DEF 14A 1 a2021proxy.htm DEF 14A Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
(Amendment No.    )
Filed by the Registrant
Filed by a party other than the Registrant¨
Check the appropriate box:
¨Preliminary Proxy Statement
¨Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
Definitive Proxy Statement
¨Definitive Additional Materials
¨Soliciting Material under §240.14a-12
______________________________________________________________________
SLEEP NUMBER CORPORATION
(Name of Registrant as Specified In Its Charter)
______________________________________________________________________
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
______________________________________________________________________
Payment of Filing Fee (Check the appropriate box):
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¨Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
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¨
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Dear Shareholders:

Sleep Number is a leader in pioneering innovations, including the revolutionary 360® smart bed and SleepIQ® technology platform, linking sleep to individual health and wellness. Through our fervent belief in the benefits of quality sleep on physical, mental and emotional wellbeing and unparalleled commitment to advance sleep health and science, we have built a beloved brand that has improved more than 13 million lives to date and generated superior stakeholder value over time.

Throughout the uncertainty and disruption of 2020, our purpose to improve the health and wellbeing of society through higher quality sleep sustained and inspired us. The global pandemic and civil unrest highlighted the intrinsic merit of Sleep Number’s culture, founded on individuality, and demonstrated the relevance, resilience and sustainability of our consumer innovation strategy and unique business model. In a year of challenge and change, we accelerated the digitization and innovation of our life-changing sleep experiences, reinforced our values of passion, integrity, innovation, courage and teamwork and delivered exceptional financial results.

Long-term Perspective and Record Performance
Dedication to our mission of improving lives by individualizing sleep experiences remains fundamental to our decisions and expedient actions. Propelled by clarity of purpose, strategic consistency and our team’s resourcefulness and agility, Sleep Number delivered record performance in 2020, which included a 53rd week:
Net sales increased by 9% to $1.9 billion;
Net operating profit grew 65% to $185 million;
Earnings per diluted share (EPS) increased 81% to $4.90;
Cash from operations grew to a record $280 million, up 48 percent;
Return on invested capital was 25%, a 720 basis point improvement from 2019; and
One-year total return to shareholders through 12/31/20 was 65% (167% for 2/26/20-2/26/21).

The profitable growth we delivered over the past five years is a testament to the long-term orientation of our management and board, our resolute belief in the life-changing impact of quality sleep and focus on doing what is right for our customers, teams, communities and partners. Over the past five years through fiscal 2020, we generated compound annual growth of 9% in net sales, 15% in EBITDA and 38% in EPS. Our five-year total shareholder return was 282% (683% for the five years ended 2/26/21). By continuing to prioritize strategic investments in science-based innovations and digital technologies, we expect to sustain top-tier stakeholder value creation well into the future.

Competitively Advantaged Strategy
For years, we have decisively invested to strengthen Sleep Number’s competitive advantages, differentiate our strategy and increase the efficiency of the digital ecosystem across our vertically integrated operations. Along with the recent acceleration of structural shifts in consumer trends that we have long anticipated, these disciplined investments have enabled us to significantly extend our sleep leadership and increase Sleep Number’s brand relevance.

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As consumers prioritize their health and wellbeing and recognize its link to sleep, they are enthusiastically embracing our revolutionary 360 smart beds, which effortlessly deliver proven quality sleep. In 2020, we introduced a new generation of smart beds and health-related advancements, including circadian rhythm insights and nighttime heart rate variability reporting, through our proprietary SleepIQ technology. These highly relevant personal metrics directly link an individual’s sleep quality to productivity and overall wellbeing, which increases our smart sleepers’ brand engagement and retention and, in turn, provides the foundation for scaling new innovations. With more than nine billion hours of longitudinal data gathered from more than one billion sleep sessions, our innovations continue to add meaningful value to consumers’ lives. Through our strategic investments in sleep science research, including the establishment of a renowned Scientific Advisory Board and collaborations with Mayo Clinic and Oxford PharmaGenesis, we are extending our sleep leadership into connected health with the potential to create significant value for customers and shareholders for years to come.

With consumers’ accelerating adoption of digital products and services, and greater reliance on digital health solutions, the convergence of physical and virtual is the new age of retail and health. Sleep Number’s digital ecosystem and exclusive, direct-to-consumer distribution model enable us to build lifelong relationships and efficiently acquire new customers. By leveraging automation and machine learning capabilities, proprietary data and our sleep professionals’ skills in building customer relationships, we pivoted to an agile “sell-from-anywhere” model in 2020 that employs technology to deliver a seamless, value-added, retail experience. In addition, improved digital capabilities have enabled us to reduce operational costs and support a more customer-focused supply chain. Together, these digital advancements provide a compelling source of future growth.

The Power of Our Purpose
While the past year illuminated serious societal issues, it also demonstrated the benefits of authentic purpose, a diverse, equitable, inclusive culture and good business. The Sleep Number team is passionate about improving individuals’ health and wellness through higher quality sleep. Together, we are leveraging this commitment to create a world that is healthier, kinder and more connected. Through our team’s tenacity and ingenuity, we advanced our sleep leadership and digital capabilities, strengthened our culture of individuality, improved our business model efficiency and increased our brand relevance. Guided by our purpose, our sleep innovations are transforming millions of lives through better sleep while creating substantial value for all stakeholders.

Sleep well, dream big,
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Shelly Ibach
Sleep Number® setting 40, average SleepIQ® score of 82
President and Chief Executive Officer

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1001 Third Avenue South
Minneapolis, Minnesota 55404

NOTICE OF 2021 ANNUAL MEETING OF SHAREHOLDERS
May 12, 2021

TO THE SHAREHOLDERS OF SLEEP NUMBER CORPORATION:
Sleep Number Corporation will hold its Annual Meeting of Shareholders at 8:30 a.m. Central Time on Wednesday, May 12, 2021. The meeting will be conducted as a virtual meeting via the Internet at www.virtualshareholdermeeting.com/SNBR2021. The purposes of the meeting are to:

1.Elect three persons to serve as Directors for three-year terms;
2.Cast an advisory vote to approve executive compensation; and
3.Cast an advisory vote to ratify the selection of Deloitte & Touche LLP as our independent registered public accounting firm for the 2021 fiscal year ending January 1, 2022.

Shareholders of record at the close of business on March 17, 2021 will be entitled to vote at the meeting and any adjournments thereof. Your vote is important. Please be sure to vote your shares in favor of the Board of Directors’ recommendations in time for our May 12, 2021 meeting date. Your attention is directed to the Proxy Statement for a more complete statement of the matters to be considered at the meeting.

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SHAREHOLDERS’ MEETING TO BE HELD ON MAY 12, 2021:
The Proxy Statement and Annual Report for the year ended January 2, 2021 and related materials are available at http://ir.sleepnumber.com. The information contained in or connected to our website is not incorporated by reference into or considered a part of this Proxy Statement. These materials were first sent or made available to our shareholders on March 30, 2021.

By Order of the Board of Directors,
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Samuel R. Hellfeld
Senior Vice President,
Chief Legal and Risk Officer and Secretary
Minneapolis, Minnesota March 30, 2021


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As used in this Proxy Statement, the terms “we,” “us,” “our,” the “Company” and “Sleep Number” mean Sleep Number Corporation and its subsidiaries and the term “common stock” means our common stock, par value $0.01 per share.



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PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS

May 12, 2021


This Proxy Statement is furnished in connection with the solicitation of proxies by the Board of Directors of Sleep Number Corporation for use at the 2021 Annual Meeting of Shareholders.

When is the Annual Meeting and how can I attend?
The Annual Meeting will be held at 8:30 a.m. Central Time on May 12, 2021. The meeting will be conducted as a virtual meeting via the Internet. Shareholders may attend the meeting and submit questions electronically during the meeting via live webcast by visiting the virtual meeting platform at www.virtualshareholdermeeting.com/SNBR2021. Shareholders will need the 16-digit control number included in Notice of Internet Availability of Proxy Materials, on the proxy card or in the instructions that accompanied the proxy materials to enter the Annual Meeting. Shareholders may log into the virtual meeting platform beginning at 8:15 a.m. Central Time on May 12, 2021. The meeting will begin promptly at 8:30 a.m. Central Time on May 12, 2021. If we determine to make any change to the date, time or procedures of our Annual Meeting, we will announce such changes in advance on our website http://ir.sleepnumber.com and file with the Securities and Exchange Commission as additional proxy materials.

What if I have technical difficulties during the meeting or trouble accessing the virtual Annual Meeting?
We will have technicians ready to assist you with any technical difficulties you may have accessing the virtual meeting. If you encounter any difficulties accessing the virtual meeting during check-in or the meeting, please call the technical support number that will be posted on the virtual meeting platform log-in page.

Who is entitled to vote?
Shareholders of record at the close of business on March 17, 2021 (the Record Date) are entitled to vote at the meeting. As of the Record Date, there were 24,812,375 shares of common stock outstanding. Each share is entitled to one vote on each matter to be voted on at the Annual Meeting. Shareholders do not have cumulative voting rights.

What is the difference between “Shareholders of Record” and “Beneficial Owners”?
If your shares are registered in your name in the records maintained by our stock transfer agent, you are a “Shareholder of Record.” If you are a Shareholder of Record, notice of the meeting was sent directly to you.

If your shares are held in the name of your bank, broker, nominee or other holder of record, your shares are held in “street name” and you are considered the “Beneficial Owner.” Notice of the meeting has been forwarded to you by your bank, broker, nominee or other holder of record, who is considered, with respect to those shares, the Shareholder of Record. As the Beneficial Owner, you have the right to direct your bank, broker, nominee or other holder of record how to vote your shares by using the voting instructions you received.

If you are a Beneficial Owner and you do not give instructions to the organization holding your shares, then that organization cannot vote your shares and the shares held by that organization will not be considered as present and will not be entitled to vote on any matter to be considered at the Annual Meeting.
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How can I receive proxy materials?
We are furnishing proxy materials to our shareholders primarily via the Internet. On or about March 30, 2021, we will begin mailing to certain of our shareholders a Notice of Internet Availability of Proxy Materials (the Shareholder Notice), which includes instructions on (i) how to access our Proxy Statement and Annual Report on the Internet, (ii) how to request that a printed copy of these proxy materials be forwarded to you and (iii) how to vote your shares. If you receive the Shareholder Notice, you will not receive a printed copy of the proxy materials unless you request a printed copy by following the instructions in the Shareholder Notice. All other shareholders will be sent the proxy materials by mail beginning on or about March 30, 2021.

Requests for printed copies of the proxy materials can be made by Internet at http://www.proxyvote.com, by telephone at 1-800-579-1639 or by email at sendmaterial@proxyvote.com by sending a blank email with your control number in the subject line. The Proxy Statement and Annual Report for the year ended January 2, 2021 and related materials are available at http://ir.sleepnumber.com. The information contained in or connected to our website is not incorporated by reference into or considered a part of this Proxy Statement.

What does it mean if I receive more than one proxy card or Shareholder Notice?
If you receive more than one proxy card or Shareholder Notice, it generally means you hold shares registered in more than one account and you should vote once for each proxy card or Shareholder Notice that you receive. If you receive a paper copy of the Proxy Statement and you choose to vote by mail, sign and return each proxy card you receive. If you choose to vote by Internet or telephone, vote once for each proxy card and/or Shareholder Notice you receive.

What are shareholders being asked to vote on?
There are three items to be voted on at the meeting:
The election of three persons to serve as Directors for three-year terms;
An advisory vote to approve executive compensation; and
An advisory vote to ratify the selection of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending January 1, 2022.

What are my voting choices?
For proposal 1, the election of Directors, you may:
Vote in favor of all nominees;
Vote in favor of specific nominees and withhold a favorable vote for specific nominees; or
Withhold authority to vote for all nominees.

For each of proposal 2 (the advisory vote to approve executive compensation) and proposal 3 (the advisory vote to ratify the selection of independent auditors) you may:
Vote in favor of the proposal;
Vote against the proposal; or
Abstain from voting on the proposal.

How does the Board recommend that I vote?
Sleep Number’s Board unanimously recommends that you vote your shares:
For the election of each of the nominees for Director nominated herein by the Board of Sleep Number;
For the advisory vote to approve executive compensation; and
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For the advisory vote to ratify the selection of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending January 1, 2022.

How are votes counted?
If you are a Shareholder of Record and grant a proxy by telephone or Internet without voting instructions, or sign and submit your proxy card without voting instructions, your shares will be voted “For” each Director nominee and “For” each of the other proposals outlined above in accordance with the recommendations of the Board.

Proxies marked “Withhold” on proposal 1 (election of Directors), or “Abstain” on proposal 2 (the advisory vote to approve executive compensation) or proposal 3 (the advisory vote to ratify the selection of independent auditors), will be counted in determining the total number of shares entitled to vote on such proposals and will have the effect of a vote “Against” a Director or such proposal.

If you are a Beneficial Owner and hold your shares in “street name,” such as through a bank, broker, nominee or other holder of record, you generally cannot vote your shares directly and must instead instruct the broker how to vote your shares using the voting instruction form provided by the broker.

What is a Broker Non-Vote?
If a Beneficial Owner does not provide timely instructions, the broker will not have the authority to vote on any non-routine proposals at the Annual Meeting, which includes proposals 1 and 2. Brokers will have discretionary authority to vote on proposal 3 because the ratification of the appointment of independent auditors is considered a routine matter. If the broker votes on proposal 3 (the advisory vote to ratify the selection of independent auditors) but does not vote on another proposal because the broker does not have discretionary voting authority and has not received instructions from the Beneficial Owner, this results in a “broker non-vote” with respect to such other proposal(s).

Broker non-votes on a matter may be counted as present for purposes of establishing a quorum for the meeting but are not considered entitled to vote on that particular matter. Consequently, broker non-votes generally will have no effect on the outcome of the matter. However, if and to the extent that broker non-votes are required to establish the presence of a quorum at the Annual Meeting, then any broker non-votes will have the same effect as a vote “Withheld” or “Abstained” on any matter that requires approval of a majority of the minimum number of shares required to constitute a quorum for the transaction of business at the Annual Meeting.

What is the vote required to approve each proposal?
Assuming that a quorum is present to vote on each of the proposals, proposals 1, 2 and 3 will require the affirmative vote of holders of a majority of the shares represented and entitled to vote in person or by proxy on such action.
Please note that proposals 2 and 3 are “advisory” votes, meaning that the shareholder votes on these items are for purposes of enabling shareholders to express their point of view or preference on these proposals, but are not binding on the Company or its Board of Directors and do not require the Company or its Board of Directors to take any particular action in response to the shareholder vote. The Board intends to consider fully the votes of our shareholders in the context of any further action with respect to these proposals.

What constitutes a “quorum,” or how many shares are required to be present to conduct business at the Annual Meeting?
The presence, directly or by proxy, of the holders of a majority of the outstanding shares of common stock entitled to vote (i.e., at least 12,406,188 shares) will constitute a quorum for the transaction of business at the Annual Meeting. In general, shares of common stock represented by a properly signed and returned proxy card or properly voted by telephone or via the Internet will be counted as shares represented and entitled to vote at the Annual Meeting for
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purposes of determining a quorum, without regard to whether the card reflects abstentions and withhold votes (or is left blank) or reflects a “broker non-vote” on a matter.

How do I vote my shares?
If you are a Shareholder of Record as of the record date, you can vote your shares in any of the following ways:
Over the telephone by calling the toll-free number on the proxy card;
Over the Internet by following the instructions on the proxy card;
Through the mail – if you received a paper copy of the Proxy Statement, you may vote by mail by signing, dating and mailing your proxy card in the envelope provided to be received no later than May 10, 2021; or
Over the Internet during the 2021 annual meeting by going to www.virtualshareholdermeeting.com/SNBR2021 and using your 16-digit control number (included on the Notice of Internet Availability of Proxy Materials, on your proxy card or in the instructions that accompanied your proxy materials).

The telephone and Internet voting procedures have been set up for your convenience. We encourage you to save corporate expense by submitting your vote by telephone or Internet. The procedures have been designed to authenticate your identity, to allow you to give voting instructions and to confirm that those instructions have been recorded properly.

If you are a Beneficial Owner of shares held in “street name,” you must vote your shares in the manner prescribed by your bank, broker, nominee or other holder of record. Your bank, broker, nominee or other holder of record has provided notice by email or a printed voting instruction card for you to use in directing the bank, broker, nominee or other holder of record how to vote your shares. Telephone and Internet voting are also encouraged for Beneficial Owners who hold their shares in street name.

Beneficial Owners should be aware that brokers are not permitted to vote shares on non-routine matters, including the election of Directors or matters related to executive compensation, without instructions from the Beneficial Owner. As a result, brokers are not permitted to vote shares on proposal 1 (election of Directors) or proposal 2 (the advisory vote to approve executive compensation) without instructions from the Beneficial Owner. Therefore, Beneficial Owners are advised that if they do not timely provide instructions to their bank, broker or other holder of record with respect to proposals 1 or 2, their shares will not be voted in connection with any such proposal for which they do not provide instructions. Proposal 3 (the advisory vote to ratify the selection of independent auditors) is considered a routine matter and, as such, brokers will still be able to vote shares held in brokerage accounts with respect to proposal 3, even if they do not receive instructions from the Beneficial Owner.

Your vote is important. Whether or not you plan to attend the meeting, we urge you to vote your shares in time for our May 12, 2021 meeting date.

May I revoke a proxy and change my vote?
Yes. Any shareholder giving a proxy may revoke it at any time prior to its use at the Annual Meeting by:
Delivering written notice of revocation to the corporate Secretary before 6:00 p.m., Eastern Daylight Time, on May 10, 2021;
Submitting to the corporate Secretary before 6:00 p.m., Eastern Daylight Time, on May 10, 2021, a properly signed proxy card bearing a later date than the prior proxy card;
Voting again by Internet or telephone before 11:59 p.m., Eastern Daylight Time, on May 11, 2021; or
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Participating in the Annual Meeting and voting your shares electronically during the Annual Meeting. Participation in the Annual Meeting will not cause your previously granted proxy to be revoked unless you specifically make that request.

Can I receive future proxy materials electronically?
Yes. If you are a Shareholder of Record and you received a paper copy of the proxy materials, you may elect to receive future Proxy Statements and Annual Reports online as described in the next paragraph. If you elect this feature, you will receive an email message notifying you when the materials are available, along with a web address for viewing the materials. If you received this Proxy Statement electronically, you do not need to do anything to continue receiving proxy materials electronically in the future.

Whether you are a Shareholder of Record or a Beneficial Owner holding shares through a bank or broker, you can enroll for future electronic delivery of Proxy Statements and Annual Reports by following these steps:
Go to our website at www.sleepnumber.com;
In the Investors section, click on Resources and then Electronic Fulfillment;
Click on the check-marked box next to the statement “Shareholders can register for electronic delivery of proxy-related materials.”; and
Follow the prompts to submit your request to receive proxy materials electronically.

You may view this year’s proxy materials at www.proxyvote.com. Generally, banks and brokers offering this choice require that shareholders vote through the Internet in order to enroll. Beneficial Owners whose bank or broker is not included in this website are encouraged to contact their bank or broker and ask about the availability of electronic delivery. As is customary with Internet usage, the user must pay all access fees.

What are the costs and benefits of electronic delivery of Annual Meeting materials?
There is no cost to you for electronic delivery of annual meeting materials. You may incur the usual expenses associated with Internet access as charged by your Internet service provider. Electronic delivery ensures quicker delivery, allows you to view or print the materials at your computer and makes it convenient to vote your shares online. Electronic delivery also conserves natural resources and saves the Company printing, postage and processing costs.

Who bears the proxy solicitation costs?
The proxies being solicited hereby are being solicited by the Board of Directors of the Company. The cost of preparing and mailing the notice of Annual Meeting, this Proxy Statement and the accompanying proxy and the cost of solicitation of proxies on behalf of the Board of Directors will be borne by the Company. The Company may solicit proxies by mail, Internet (including by email, Twitter, the use of our Investor Relations website and other online channels of communication), telephone, facsimile and other electronic channels of communication, town hall meetings, personal interviews, press releases and press interviews. Our Directors, officers and regular team members may, without compensation other than their regular compensation and the reimbursement of expenses, solicit proxies by telephone or personal conversation. In addition, we may reimburse brokerage firms and others for their reasonable and documented expenses incurred in connection with forwarding proxy materials to the Beneficial Owners of our common stock.
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The following table shows the beneficial ownership of Sleep Number common stock as of February 27, 2021 (unless another date is indicated) by: (a) each Director, each nominee for Director recommended by our Board and each executive officer named in the Summary Compensation Table on page 45 of this Proxy Statement; (b) all Directors and executive officers as a group; and (c) each person known by us to be the Beneficial Owner of more than 5% of Sleep Number common stock.
Title of Class
Name and Address of Beneficial Owner (1)
Amount and Nature of Beneficial Ownership (2)(3)
Percent of Class
Common StockDaniel I. Alegre36,816 *
Common StockMelissa Barra69,645 *
Common StockAndrea L. Bloomquist86,198 *
Common StockKevin K. Brown67,895 *
Common StockDavid R. Callen89,756 *
Common Stock
Stephen L. Gulis, Jr. (4)
76,572 *
Common Stock
Michael J. Harrison (4)
54,410 *
Common StockJulie M. Howard2,270 *
Common StockShelly R. Ibach505,373 2.0%
Common StockDeborah L. Kilpatrick, Ph.D.12,960 *
Common Stock
Brenda J. Lauderback (4)
49,600 *
Common Stock
Barbara R. Matas (4)
30,445 *
Common Stock
Kathleen L. Nedorostek (4)
46,651 *
Common StockJean-Michel Valette245,702 *
Common Stock
All directors and executive officers as a group (18 persons) (5)
1,469,138 5.7%
Common Stock
BlackRock, Inc. (6)
55 East 52nd Street
New York, New York 10055
4,181,450 16.6%
Common Stock
The Vanguard Group, Inc. (7) 
100 Vanguard Blvd. 
Malvern, Pennsylvania 19355
2,820,724 11.2%
Common Stock
Disciplined Growth Investors, Inc. (8)
150 South Fifth Street, Suite 2550
Minneapolis, Minnesota 55402
2,495,455 9.9%
Common Stock
AllianceBernstein L.P. (9) 
1345 Avenue of the Americas
New York, New York 10105
1,332,480 5.3%
* Less than 1% of the outstanding shares.
(1)The business address for each of the Directors and executive officers of the Company is c/o Sleep Number Corporation, 1001 Third Avenue South, Minneapolis, Minnesota 55404.
(2)The shares shown include the following shares that Directors and executive officers have the right to acquire within 60 days through the exercise of stock options: Mr. Alegre, 15,387; Ms. Barra, 22,198; Ms. Bloomquist, 8,148; Mr. Brown, 30,762; Mr. Callen, 32,837; Mr. Gulis, 1,865; Mr. Harrison, 15,387; Ms. Ibach, 244,813; Ms. Kilpatrick, 4,030; Ms. Lauderback, 17,886; Ms. Matas, 1,865; and Ms. Nedorostek, 13,892.
(3)The shares shown include the following shares that executive officers have the right to acquire within 60 days through the vesting of performance restricted stock units: Ms. Barra, 11,265; Ms. Bloomquist, 13,516; Mr. Brown, 13,516; Mr. Callen, 15,774; and Ms. Ibach, 90,127.
(4)The Sleep Number Corporation 2020 Equity Incentive Plan (the 2020 Plan) permits non-employee Directors to receive Director fees in the form of common stock in lieu of cash, and to defer receipt of such shares. In addition, the 2020 Plan permits non-employee Directors to defer receipt of shares of the Company’s common stock under an Incentive Award granted under the 2020 Plan (referred to as Restricted Stock Units or RSUs). The Directors are entitled to the deferred shares and fully-vested RSUs until the earlier of an elected date or separation of service from the Company. Mr. Gulis’ amount includes 49,746 shares that were deferred in lieu of Director fees and 22,181 RSUs that were deferred. Mr. Harrison’s amount
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includes 1,123 RSUs that were deferred. Ms. Lauderback’s amount includes 8,573 RSUs that were deferred. Ms. Matas’ amount includes 11,529 shares that were deferred in lieu of Director fees and 4,987 RSUs that were deferred. Ms. Nedorostek’s amount includes 18,578 shares that were deferred in lieu of Director fees.
(5)Includes an aggregate of 437,381 shares that Directors and executive officers as a group have the right to acquire within 60 days through the exercise of stock options. Includes an aggregate of 158,812 shares held under performance restricted stock units that have not vested and 1,249 shares that Directors and executive officers as a group have the right to acquire within 60 days through the vesting of restricted stock units. Also includes 79,853 shares that were deferred by non-employee Directors in lieu of Director fees and 109,147 RSUs that were deferred by executive officers and non-employee Directors.
(6)BlackRock, Inc. reported in a Schedule 13G/A filed with the Securities and Exchange Commission on January 26, 2021 that as of December 31, 2020 it beneficially owned 4,181,450 shares of Common Stock of Sleep Number Corporation, had sole power to vote or to direct the vote with respect to 4,133,877 shares and sole dispositive power with respect to 4,181,450 shares.
(7)The Vanguard Group, Inc. reported in a Schedule 13G/A filed with the Securities and Exchange Commission on February 10, 2021 that as of December 31, 2020 it beneficially owned 2,820,724 shares of Common Stock of Sleep Number Corporation, had no sole power to vote or to direct the vote with respect to any shares, shared power to vote or to direct the vote with respect to 42,417 shares, shared dispositive power with respect to 66,220 shares and sole dispositive power with respect to 2,754,504 shares.
(8)Disciplined Growth Investors, Inc. reported in a Schedule 13F filed with the Securities and Exchange Commission on February 16, 2021 that as of December 31, 2020 it beneficially owned 2,495,455 shares of Common Stock of Sleep Number Corporation, had sole dispositive power with respect to 2,495,455 shares, sole power to vote or to direct the vote with respect to 2,123,325 shares and no voting power with respect to 372,130 shares.
(9)AllianceBernstein L.P. reported in a Schedule 13G/A filed with the Securities and Exchange Commission on February 8, 2021 that as of December 31, 2020 it beneficially owned 1,332,480 shares of Common Stock of Sleep Number Corporation, had sole power to vote or to direct the vote with respect to 1,261,457 shares, shared dispositive power with respect to 24,990 shares and sole dispositive power with respect to 1,307,490 shares.
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Nomination
Article XIV of our Third Restated Articles of Incorporation provides that the number of Directors must be at least one but not more than 12 and must be divided into three classes as nearly equal in number as possible. The exact number of Directors is determined from time-to-time by the Board of Directors. The term of each class is three years and the term of one class expires each year in rotation.

Immediately prior to the 2021 Annual Meeting, our Board will consist of 10 members, three of which will be up for election at the 2021 Annual Meeting. The Board has nominated Daniel I. Alegre, Stephen L. Gulis, Jr. and Brenda J. Lauderback for election to the Board, each for a term of three years expiring at the 2024 Annual Meeting, or until their successors are elected and qualified. Mr. Alegre, Mr. Gulis and Ms. Lauderback have each consented to being named as a nominee in this Proxy Statement and to serve as a Director if elected. Mr. Alegre has served on our Board since 2013, Mr. Gulis has served on our Board since 2005 and Ms. Lauderback has served on our Board since 2004.

Vote Required
The election of each nominee for Director requires the affirmative vote of a majority of the shares represented and entitled to vote on the election of Directors at the Annual Meeting. Any broker non-votes on the election of each nominee for Director will be treated as shares not entitled to vote on that matter, and thus will not be counted in determining whether the Director has been elected.

Board Recommendation
The Board recommends a vote “For” the election of each of Mr. Alegre, Mr. Gulis and Ms. Lauderback. In the absence of other instructions, properly signed and delivered proxies will be voted “For” the election of each of these nominees.

If prior to the Annual Meeting, the Board should learn that any nominee will be unable to serve for any reason, the proxies that otherwise would have been voted for such nominee will be voted for such substitute nominee as selected by the Board. Alternatively, the proxies, at the Board’s discretion, may be voted for such fewer number of nominees as results from the inability of any such nominee to serve. The Board has no reason to believe that any of the nominees will be unable to serve.

Information about the Board’s Nominees and Other Directors
The following table provides information as of the date of this Proxy Statement about each individual serving as a Director of our Company and each individual nominated by the Board to serve as a Director. Each Director or Nominee has furnished the information included below that relates to his or her respective age, principal occupation and business experience, as well as the names of other boards on which he or she currently serves as a Director or has served in the past. In addition, the table below highlights the relevant experience, qualifications, attributes and skills that led our Board to conclude that each Director or nominee is qualified to serve as a Director of our Company.

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Nominees for election this year to three-year terms expiring in 2024
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OCCUPATION
President and Chief Operating Officer of Activision Blizzard, Inc., a leading interactive entertainment company, effective April 2020; Held various roles at Google, Inc., an innovative search and advertising company, from 2004 to March 2020, including President of Google Retail, Shopping and Payments, President of Global Partnerships, as well as President of Asia Pacific and Japan, overseeing all regional operations, and Vice President of Latin American and Asia Pacific Business Development; Previously, Mr. Alegre was Vice President at Bertelsmann, responsible for business development of its ecommerce division.
Daniel I. Alegre
Age 52
Director since 2013
QUALIFICATIONS
Mr. Alegre provides our Board with valuable insight into mobile and technology platforms, digital brand building and advertising and e-commerce deployment and strategy, as well as extensive leadership in global operations and expansion, partner management and business development in technology and mass media industries.

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OCCUPATION
Retired Executive Vice President and President of Global Operations for Wolverine World Wide, Inc. (WWW), a global marketer of branded footwear, apparel and accessories, a position he held from October 2007 until July 2008; Executive Vice President, CFO and Treasurer of WWW from April 1996 until October 2007.
Stephen L. Gulis, Jr.
Age 63
Director since 2005
QUALIFICATIONS
Mr. Gulis provides our Board with extensive experience as a senior executive of a publicly traded consumer products company, including as a chief financial officer and treasurer with responsibility for capital stewardship, cash management, investor relations, as well as significant M&A activity and broad oversight of financial reporting and controls. Mr. Gulis also brings expertise in risk management, implementation of enterprise technology platforms, global operations, human resources and product sourcing and quality directives.
OTHER PUBLIC COMPANY BOARDS
Current
Independent Bank Corporation

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OCCUPATION
Former President of the Retail and Wholesale Group for the Nine West Group, Inc., a designer and marketer of women’s footwear and accessories, from May 1995 until January 1998; Previous roles include President of Wholesale and Manufacturing for US Shoe Corporation and more than 18 years in senior merchandising roles at the Department Store Division of Target Corporation.
Brenda J. Lauderback
Age 70
Director since 2004
QUALIFICATIONS
Ms. Lauderback provides our Board extensive leadership in merchandising, marketing, product development and design and manufacturing at prominent national wholesale and retail companies. Her breadth of experience as a Director on several other publicly traded company boards also provides our Board with significant insight into leading practices in executive compensation and corporate governance. Ms. Lauderback is a National Association of Corporate Directors (NACD) Board Leadership Fellow, having completed NACD’s comprehensive program of study for Directors and corporate governance professionals. She supplements her skill sets through ongoing engagement with the Director community, and access to leading practices. Ms. Lauderback was selected as one of the top 100 Directors by NACD in 2017.
OTHER PUBLIC COMPANY BOARDS
CurrentPrior
Denny’s CorporationBig Lots, Inc.
Wolverine World Wide, Inc.Louisiana-Pacific Corporation
Irwin Financial Corporation
Jostens, Inc.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS YOU VOTE “FOR” THE ELECTION OF EACH OF THE NOMINEES LISTED ABOVE


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Directors not standing for election this year whose terms expire in 2022:
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OCCUPATION
Independent advisor to consumer brand companies. Since January 2020, he has served as Non-Executive Chairman of Seasalt Holdings, Ltd., a UK-based designer and retailer of apparel and accessories. Since January 2016, he has served on the board of OOFOS, a leader in the emerging category of recovery footwear for athletes, where he was previously Interim CEO from March 2014-May 2015. From August 2016 to January 2017, Mr. Harrison served as President & Chief Operating Officer of Grand Circle Corporation, a leader in overseas small group travel serving Americans aged 50 and older. From 2014-2016, Mr. Harrison served on the board of Totes Isotoner, a leading marketer of umbrellas, gloves, rainwear, slippers and other weather-related accessories. Held various roles at Timberland from 2003 through 2012, including Chief Brand Officer, Co-President, Senior Vice President of Worldwide Sales and Marketing, and as Senior Vice President International. Prior to joining Timberland, Mr. Harrison served in various executive, marketing, operations and general management capacities with Procter & Gamble - in Europe, U.S., Australia and Asia.
Michael J. Harrison
Age 60
Director since 2011

QUALIFICATIONS
Mr. Harrison brings 30 years of business acumen to our Board from his senior executive experience in marketing, product design and development, retailing and international management with leading consumer brands.


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OCCUPATION
President and Chief Executive Officer of Sleep Number Corporation since June 2012; Executive Vice President and Chief Operating Officer from June 2011 to June 2012; Executive Vice President, Sales & Merchandising from October 2008 to June 2011; Previously held various senior executive operations and merchandising roles at Macy’s, Inc. and the Department Store Division at Target Corporation for more than 25 years. Ms. Ibach is Sleep Editor-at-Large for Thrive Global, serves on the executive committee of the Minnesota Business Partnership, and is the chairperson for the American Cancer Society’s CEOs Against Cancer Minnesota chapter.

Shelly R. Ibach
Age 61
Director since 2012
QUALIFICATIONS
Ms. Ibach brings leadership, experience and perspective as Sleep Number’s President and CEO along with a dedication to sustainable, long-term growth and shareholder value. Ms. Ibach brings an intimate knowledge of our customer, culture, strategy, product, marketing, technology, operations and competitive environment gained during fourteen years in executive management with the Company. Ms. Ibach also brings more than two decades of retail experience with P&L oversight, brand and product development and customer-focused leadership experience with prominent national retailers.

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OCCUPATION
Co-Chief Executive Officer and Executive Chairman of the Board of Evidation Health, Inc., a digital health company, since August 2020, and previously Chief Executive Officer from 2014 to August 2020; Currently on the board of directors for nonprofit The Task Force for Global Health and for privately held women’s health companies NextGen Jane and Emme; Vice President of Market Development and Chief Commercial Officer of CardioDx, a genomic diagnostics company, from 2006 to 2014 with responsibility for sales, marketing and reimbursement from insurers; Held multiple leadership roles at Guidant Corporation, a Fortune 500 medical device company, from 1998 to 2006 (acquired by Boston Scientific), including Research Fellow, Director of R&D, and Director of New Ventures in the Vascular Intervention Division; Serves on the College of Engineering Advisory Boards for Georgia Tech and the California Polytechnic State University, and is a Fellow of the American Institute of Medical and Biological Engineering; Holds multiple patents in medical device technologies and drug delivery devices; Advises multiple venture capital funds and privately-held startup companies in the digital health sectors.
Deborah L. Kilpatrick, Ph.D. 
Age 53
Director since 2018

QUALIFICATIONS
Ms. Kilpatrick brings to our Board substantial expertise and experience in the development and commercialization of medical devices and digital health products, and a track record of successful product innovation to transform health care with big data in the genomic and digital era. With her deep understanding of digital health opportunities and passion for our sleep innovations, Ms. Kilpatrick’s appointment to our Board supports our strategy of improving lives through individualizing sleep experiences and advancement of our SleepIQ technology platform.

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OCCUPATION
Former Managing Director and Chairman, Leveraged Finance, Citigroup Global Markets, Inc. from 2013 to 2016, and co-head from 2006 to 2013; From 1985 to 2006 Ms. Matas held various leadership positions in leveraged finance and high yield capital markets at Citicorp, Salomon Brothers and Citigroup; Ms. Matas began her career as an auditor at Touche Ross & Co.
Barbara R. Matas
Age 61
Director since 2016
QUALIFICATIONS
Ms. Matas brings to our board substantial expertise in capital structure and financial strategy gained through more than 30 years of professional experience in advising boards and management teams on capital markets, capital structure and risk assessment and management.
OTHER PUBLIC COMPANY BOARDS
Current
Apollo Investment Corporation
BRP Group (Baldwin Risk Partners)

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Directors not standing for election this year whose terms expire in 2023:
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OCCUPATION
Chief Executive Officer of Riveron, a national business advisory firm specializing in accounting, finance, technology, and operations, effective March 2021; Former Chief Executive Officer of Navigant Consulting, Inc. (Navigant), a specialized global professional services firm, from March 2012 to October 2019; Former Chairman of the Board of Navigant from May 2014 to October 2019; Previous leadership positions with Navigant include President (2006-2012), Chief Operating Officer (2003-2006) and Chief Human Capital Officer (2000-2003).
Julie M. Howard
Age 58
Director since 2020
QUALIFICATIONS
Ms. Howard provides our Board with significant strategic, financial and global expertise from her tenure as Chief Executive Officer and the other positions she held at Navigant. Ms. Howard also brings important board leadership and corporate governance experience from serving as the Chairman of the Board of Navigant and on other public company boards and their respective committees.
OTHER PUBLIC COMPANY BOARDS
CurrentPrior
ManpowerGroup, Inc.Kemper Corporation
 Navigant Consulting, Inc.
InnerWorkings, Inc.

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OCCUPATION
Former Global CEO of Nine West Group, a division of Nine West Holdings, Inc., a leading global designer, marketer and wholesaler of brands in apparel, footwear and accessories from April 2014 to September 2014; Group President, Global Footwear and Accessories at The Jones Group from October 2012 until April 2014; President of the North American Wholesale and Global Licensing divisions of Coach Inc. from 2003 to 2012.
Kathleen L. Nedorostek
Age 68
Director since 2011
QUALIFICATIONS
Ms. Nedorostek provides our Board with significant experience leading high-end, multi-national branded consumer products companies with both manufacturing and retail operations. Her experience includes strategic planning for global businesses, P&L oversight, organizational strategy and change management, product design, global licensing and distribution, brand marketing and real estate.

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OCCUPATION
Chairman of our Board since May 2010; Independent adviser to branded consumer companies; Currently serves as Lead Director of The Boston Beer Company and as a Director of Intertek Group plc; Served as Chairman of the Board of Directors of Peet’s Coffee and Tea, Inc. from January 2004 to October 2012; Also served as non-executive Chairman of the Robert Mondavi Winery from April 2005 to October 2006 and was its Managing Director from October 2004 to April 2005; Head of Branded Consumer Equity Research and Branded Consumer Venture Capital Investments at Hambrecht & Quist LLC, an investment banking firm, during the 1980s and 1990s.
Jean-Michel Valette
Age 60
Director since 1994
QUALIFICATIONS
Mr. Valette provides our Board with significant, relevant leadership and a proven track record of significant long-term shareholder value creation with multiple successful branded consumer growth companies as well as valuable perspective in guiding the company on strategy, financial performance and corporate governance practices.
OTHER PUBLIC COMPANY BOARDS
CurrentPrior
The Boston Beer CompanyPeet’s Coffee and Tea, Inc.
Intertek Group plcGolden State Vintners

After serving 17 years as a Sleep Number Director, Michael A. Peel retired from the Board when his term expired at the 2020 Annual Meeting of Shareholders. Following his retirement from the Board, Mr. Peel was appointed to serve in a non-voting advisory role to the Board, as Director Emeritus. In this capacity, Mr. Peel has received compensation consistent with that of non-employee directors. Mr. Peel’s service as Director Emeritus will terminate following the 2021 Annual Meeting of Shareholders.
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Information about the Board of Directors and its Committees
The Board of Directors has determined that each of the following Directors who served as a member of our Board during any part of fiscal 2020 is an “independent Director” as defined by applicable rules of the Nasdaq Stock Market and the rules and regulations of the Securities and Exchange Commission (SEC):

Daniel I. AlegreStephen L. Gulis, Jr.Michael J. Harrison
Julie M. HowardDeborah L. Kilpatrick, Ph.D.Brenda J. Lauderback
Barbara R. MatasKathleen L. NedorostekJean-Michel Valette

The Board maintains three standing committees, including an Audit Committee, a Management Development and Compensation Committee and a Corporate Governance and Nominating Committee.  Each of the committees of the Board has a charter and each of these charters is included in the Investor Relations section of the Company’s website at http://ir.sleepnumber.com.  The information contained in or connected to our website is not incorporated by reference into or considered a part of this Proxy Statement.

The current members of each of the Board committees are identified in the table below.
DirectorAudit
Committee
Management
Development and
Compensation
Committee
Corporate
Governance and
Nominating
Committee
Daniel I. AlegreX
Stephen L. Gulis, Jr.XX
Michael J. HarrisonXChair
Julie M. HowardX
Deborah L. Kilpatrick, Ph.D.XX
Brenda J. LauderbackChair
Barbara R. MatasChair
Kathleen L. NedorostekXX
Jean-Michel Valette*
*In his capacity as non-executive Chairman of the Board, Mr. Valette generally attends all committee meetings.

The Board has determined that each Director serving on a committee meets the independence and other requirements applicable to such committee prescribed by applicable rules and regulations of the Nasdaq Stock Market, the SEC and the Internal Revenue Service.

The Board of Directors has further determined that three current members of the Audit Committee, Stephen L. Gulis, Jr., Julie M. Howard and Barbara R. Matas, meet the definition of “audit committee financial expert” under rules and regulations of the SEC and meet the qualifications of “financial sophistication” under the Marketplace Rules of the Nasdaq Stock Market.  These designations related to our Audit Committee members’ experience and understanding with respect to certain accounting and auditing matters are disclosure requirements of the SEC and the Nasdaq Stock Market and do not impose upon any of them any duties, obligations or liabilities that are greater than those generally imposed on a member of our Audit Committee or of our Board of Directors.

The Board of Directors met in person or virtually six times during 2020.  The Audit Committee met in person or virtually nine times during 2020.  The Management Development and Compensation Committee met in person or virtually seven
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times during 2020.  The Corporate Governance and Nominating Committee met in person or virtually seven times during 2020.  Each of the members of our Board of Directors serving in 2020 attended 75% or more of all meetings of the Board and committees on which they served during fiscal 2020.

Audit Committee
The Audit Committee is comprised entirely of independent Directors, currently including Barbara R. Matas (Chair), Stephen L. Gulis, Jr., Julie M. Howard and Deborah L. Kilpatrick, Ph.D. The Audit Committee provides assistance to the Board in satisfying its fiduciary responsibilities relating to accounting, auditing, operating and reporting practices of our Company.  The Audit Committee is responsible for providing independent, objective oversight with respect to our Company’s accounting and financial reporting functions, internal and external audit functions, systems of internal controls regarding financial matters, enterprise risk assessment and management, cybersecurity, and legal, ethical and regulatory compliance.  The responsibilities and functions of the Audit Committee are further described in the Audit Committee Report beginning on page 57 of this Proxy Statement.

Management Development and Compensation Committee
The Management Development and Compensation Committee is comprised entirely of independent Directors, currently including Brenda J. Lauderback (Chair), Daniel I. Alegre, Michael J. Harrison and Kathleen L. Nedorostek.  The principal function of the Committee is to discharge the responsibilities of the Board relating to executive compensation and development of current and future leadership resources.

The responsibilities and functions of the Management Development and Compensation Committee, as well as its processes and procedures for consideration and determination of executive and Director compensation, are further described in the Compensation Discussion and Analysis beginning on page 26 of this Proxy Statement.

Corporate Governance and Nominating Committee
The Corporate Governance and Nominating Committee is comprised entirely of independent Directors, currently including Michael J. Harrison (Chair), Stephen L. Gulis, Jr., Deborah L. Kilpatrick, Ph.D. and Kathleen L. Nedorostek.  The primary functions of the Corporate Governance and Nominating Committee are to develop and recommend to the Board corporate governance principles to govern the Board, its committees and our executive officers and team members in the conduct of the business and affairs of our Company; to identify and recommend to the Board individuals qualified to become members of the Board and its committees; and to develop and oversee the annual Board and committee evaluation process.

Board Leadership Structure
Our Board is currently comprised of nine independent Directors and one executive Director, Shelly R. Ibach, who has served as our President and Chief Executive Officer since June 2012.  Since February 2008, the Board has determined to separate the positions of Chairman of the Board and Chief Executive Officer based on its review of the appropriate leadership structure at this time.  Jean-Michel Valette, an independent Director, has served as Chairman of the Board since May 2010.

Consistent with the Company’s Corporate Governance Principles, the Board retains the right to review this determination and to either continue to maintain these positions as separated positions or to combine the positions, as the Board determines to be in the best interests of the Company at the time.  During any period in which the positions of Chairman of the Board and Chief Executive Officer are combined, the Board would appoint a Lead Director from among the independent members of the Board, who would have certain Board leadership responsibilities specified in our Corporate Governance Principles.

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Board Role in Risk Oversight
Our Board is responsible for overseeing the Company’s policies and practices with respect to risk assessment and risk management and has delegated to the Audit Committee the responsibility of assisting the Board in fulfilling this role.  Among its duties and processes, the Audit Committee (a) reviews and discusses with management the Company’s policies and practices with respect to enterprise risk assessment and risk management, including with respect to financial risk exposures, internal controls over financial reporting and cybersecurity; (b) oversees the Company’s internal audit function and processes; (c) establishes and oversees procedures for receiving and addressing complaints regarding accounting, internal controls or auditing matters; (d) reviews legal compliance and other legal matters with the Company’s legal counsel; and (e) reports to the full Board with respect to matters within its area of responsibility.

The Audit Committee oversees the Company’s internal audit function, which function is responsible for undertaking an annual enterprise risk assessment process and reporting to the Audit Committee and the Board with respect to this assessment and related risk management and mitigation strategies. The Audit Committee reviews and approves, at least annually, the Company’s internal audit plan and receives quarterly reports with respect to the results of internal audits.  The leader of the Company’s internal audit function reports directly to the Audit Committee with respect to internal audit matters, and the Audit Committee has authority to review and approve the appointment, replacement or dismissal of the leader of this function.  The leader of the internal audit function meets regularly in executive session with the Audit Committee without any other members of the Company’s management team present.

In addition to the Audit Committee’s role, each of the other committees considers risks within its respective areas of responsibility.  We believe our current Board leadership structure helps ensure proper risk oversight, based on the allocation of duties among committees and the role of our independent Directors in risk oversight.

Director Nominations Process
The Corporate Governance and Nominating Committee (the CGNC) administers the process for nominating candidates to serve on our Board of Directors.  The CGNC recommends candidates for consideration by the Board as a whole, which is responsible for appointing candidates to fill any vacancy that may be created between meetings of the shareholders and for nominating candidates to be considered for election by shareholders at our Annual Meeting.
Consistent with the Company’s Corporate Governance Principles, the CGNC periodically reviews with the Board the appropriate skills and characteristics required of Board members in the context of the current membership of the Board and the strategic direction of the Company.

The Board has established selection criteria to be applied by the CGNC and by the full Board in evaluating candidates for election to the Board.  These criteria, which are set forth in our Corporate Governance Principles, include general characteristics, areas of specific expertise and experience and considerations of diversity.  The general characteristics include:
Independence;
Integrity;
A proven record of accomplishment and sound judgment in areas relevant to our business;
Belief in and passion for our mission and vision;
The ability to bring strategic and innovative insights to the discussion and challenge and stimulate management;
Willingness to both speak one’s mind and consider divergent ideas and opinions;
Understanding of, and ability to commit sufficient time to, Board responsibilities and duties; and
Subject matter expertise.

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The specific areas of expertise and experience sought by the CGNC and the Board from time to time will vary depending on the composition of the Board and the strategic direction of the Company, but will generally include CEO experience, executive level experience with analogous businesses and industries, financial and accounting expertise and functional expertise relevant to the strategic direction of the Company or the needs of the Board and its committees.

Our Director selection and nomination process specifically includes consideration of diversity, including gender, race, ethnicity, age, sexual orientation, educational and professional experience and differences in viewpoints.  The CGNC considers Director candidates in the context of the Board’s overall composition, including whether the Board has an appropriate combination of professional experience, skills, knowledge and variety of viewpoints and backgrounds in light of the Company’s current and expected future needs.  We are committed to seeking Director candidates who reflect diverse perspectives, including a complementary mix of professional and personal backgrounds and experiences, which we believe is critical to the success of the Company and its ability to create long-term value for our stakeholders.   Currently, six of our ten Directors self-identify as women, two of our Directors self-identify as racially/ethnically diverse, one of our Directors self-identifies as LGBTQ+ and two of our three standing committees are chaired by women.  Our Corporate Responsibility and Sustainability Report, posted within the Investor Relations section of our Company website at http://ir.sleepnumber.com, provides additional information about the diversity of our Directors. The information contained in or connected to our website or the Corporate Responsibility and Sustainability Report is not incorporated by reference into or considered a part of this Proxy Statement.

The CGNC reviews these selection criteria and the overall Director nomination process at least annually in connection with the nomination of Directors for election at the Company’s annual meeting for consistency with best practices in corporate governance and effectiveness in meeting the needs of the Board from time-to-time.

The CGNC may use a variety of methods for identifying potential nominees for election to the Board, including consideration of candidates recommended by Directors, officers or shareholders of the Company.  The CGNC also has the authority under its charter to engage professional search firms or other advisors to assist the CGNC in identifying candidates for election to the Board, or to otherwise assist the CGNC in fulfilling its responsibilities.

Shareholder nominations of candidates for membership on the Board submitted in accordance with the terms of our Bylaws will be reviewed and evaluated by the CGNC in the same manner as for any other nominations.  Any shareholder who wishes the CGNC to consider a candidate should submit a written request and related information to our corporate Secretary.  Under our Bylaws, if a shareholder intends to nominate a person for election to the Board of Directors at a shareholder meeting, the shareholder is required to give written notice of the proposed nomination to the corporate Secretary at least 120 days prior to the first anniversary of the date that the Company first released or mailed its proxy materials to shareholders in connection with the preceding year’s regular or annual meeting.  The shareholder’s notice must include, for each nominee whom the shareholder proposes to nominate for election as a Director: (i) the name, age, business address and residence address of the nominee, (ii) the principal occupation or employment of the nominee, (iii) the class and number of shares of capital stock of the Company that are beneficially owned by the nominee and (iv) any other information concerning the nominee that would be required under the rules of the Securities and Exchange Commission in a proxy statement soliciting proxies for the election of such nominee.  The shareholder’s notice must also include: (i) the name and address of the nominating shareholder, as they appear on the Company’s books and (ii) the class and number of shares of the Company that are owned beneficially and of record by the shareholder.  The shareholder’s notice must also be accompanied by the proposed nominee’s signed consent to serve as a Director of the Company.

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Shareholder Engagement
Our Board of Directors and management team maintain a deep commitment to strong corporate governance.  Engagement with, and accountability to, our shareholders are cornerstones of this commitment.  Accordingly, we maintain an active shareholder engagement program that facilitates channels of communication and aims to foster relationships with our shareholders to drive sustainable, long-term growth and shareholder value.  As part of our engagement program, members of our management team regularly meet with shareholders, in-person, virtually or by phone, occasionally joined by one or more members of our Board, to discuss strategy, governance, pay for performance orientation and other matters of shareholder interest.  Our ongoing shareholder engagement and commitment to long-term value creation will continue to inform the Board of Director’s deliberations in 2021 and beyond.

Shareholders may communicate with the Board of Directors, its committees or any individual member of the Board of Directors by sending a written communication to our corporate Secretary at Sleep Number Corporation, 1001 Third Avenue South, Minneapolis, MN 55404.  The corporate Secretary will promptly forward any communication so received to the Board, any committee of the Board or any individual Board member specifically addressed in the communication.  In addition, if any shareholder or other person has a concern regarding any accounting, internal control or auditing matter, the matter may be brought to the attention of the Audit Committee, confidentially and anonymously, by calling 1-800-835-5870.  The Company reserves the right to revise or make exceptions to this policy in the event that the process is abused, becomes unworkable or otherwise does not efficiently serve the purposes of the policy.

Policy Regarding Director Attendance at Annual Meeting
Our policy is to require attendance by all of our Directors at our Annual Meeting of Shareholders, except for absences due to causes beyond the reasonable control of the Director.  All of the Directors then serving on our Board were in attendance at our 2020 Annual Meeting of Shareholders.

Corporate Governance Principles
Our Board of Directors has adopted Corporate Governance Principles that were originally developed and recommended by the CGNC.  These Corporate Governance Principles are available in the Investor Relations section of the Company’s website at http://ir.sleepnumber.com.  The information contained in or connected to our website is not incorporated by reference into or considered a part of this Proxy Statement.  Among these Corporate Governance Principles are the following:

Independence.  A substantial majority of the members of the Board should be independent, non-employee Directors.  It is the responsibility of the Board to establish the standards for independence, and the Board has followed the independence standards for companies listed on The Nasdaq Stock Market.  All of our Directors are independent except our Chief Executive Officer, Shelly R. Ibach.  All committees of the Board are composed entirely of independent Directors.
Chairman and Chief Executive Officer Positions.  At the present time, the positions of Chairman of the Board and Chief Executive Officer are separated and the position of Chairman of the Board is held by a non-executive, independent member of the Board.  The Board retains the right to review this determination and to either continue to maintain these positions as separated positions or to combine the positions, as the Board determines to be in the best interests of the Company at the time.  During any period in which the positions of Chairman of the Board and Chief Executive Officer are combined, the Board will appoint a Lead Director from among the independent members of the Board.
Classified Board Structure.  Our Third Restated Articles of Incorporation provide for a classified Board serving staggered terms of three years each.  The Board will periodically review its classified Board structure in the context of other provisions and measures applicable to unsolicited takeover proposals with the objective of positioning the Board and the Company to maximize the long-term value of our Company for all shareholders.
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Majority Voting Standard with Resignation Policy for Board Elections.  Our Third Restated Articles of Incorporation provide for a majority voting standard in the case of uncontested elections of Directors and a plurality voting standard in the case of contested elections of Directors in order to reduce the risk of a “failed election” in a contested Director election. If a nominee for Director who is an incumbent Director is not elected at a meeting of shareholders and no successor to the incumbent Director is elected at the meeting of shareholders, the incumbent Director shall promptly offer to tender his or her resignation to the Board.  The CGNC shall make a recommendation to the Board on whether to accept or reject the offer, or whether other action should be taken.  The Board shall act on whether to accept the Director’s offer, taking into account the CGNC’s recommendation, and publicly disclose (by press release, a filing with the SEC or other broadly disseminated means of communication) its decision and the supporting rationale within 90 days after the date of the certification of the election results.  The CGNC, in making its recommendation, and the Board, in making its decision, may each consider any factors or other recommendations that it considers relevant and appropriate.  The incumbent Director who offers to tender his or her resignation shall not participate in the Board’s decision.  If such incumbent Director’s offer to tender his or her resignation is not accepted by the Board, such Director shall continue to serve until his or her successor is duly elected, or his or her earlier death, resignation, retirement, disqualification or removal.

Board Diversity.  Our Director selection and nomination process specifically includes consideration of diversity, including gender, race, ethnicity, age, sexual orientation, educational and professional experience and differences in viewpoints. The CGNC considers Director candidates in the context of the Board’s overall composition, including whether the Board has an appropriate combination of professional experience, skills, knowledge and variety of viewpoints and backgrounds in light of the Company’s and Board’s current and expected future needs. We are committed to seeking Director candidates who reflect diverse perspectives, including a complementary mix of professional and personal backgrounds and experiences, which we believe is critical to the success of the Company and its ability to create long-term value for our stakeholders.

Approach to Term and Age Limits.  We believe that specific or fixed term or age limits could cause the Company to arbitrarily lose important contributors to the Board.  It is the sense of the Board, however, that a Director who reaches the age of 72 should promptly tender his or her resignation to the Chair of the CGNC, and the Board should have an opportunity to review the qualifications of the Director for continued Board membership. The CGNC will review the qualifications of the Director for continued Board membership annually and make a recommendation to the Board each year, which will make a final determination with respect to the tendered resignation.

Change in Responsibilities.  Directors who retire or who have a change in their principal employment or affiliation after joining the Board should not necessarily leave the Board.  There should, however, be an opportunity for the Board to review the qualifications of the Director for continued Board membership.  Any Director who undergoes a material change in principal employment or affiliation will promptly tender his or her resignation to the Chair of the CGNC.  The CGNC will review the qualifications of the Director for continued Board membership and make a recommendation to the Board, which will make a final determination with respect to the tendered resignation.

Other Board or Audit Committee Service.  The Board recognizes that service on other boards can in some circumstances limit the time that Directors may have to devote to fulfilling their responsibilities to the Company.  It is the Board’s guideline that no Director shall serve on more than a total of four public company boards (including the Sleep Number Board), no Director who is a named executive officer (of another public company) serve on more than a total of two public company boards (including the Sleep Number Board), and that no member of the Company’s Audit Committee shall serve on more than a total of three public company audit committees (including the Sleep Number Audit Committee).  If any Director exceeds or proposes to exceed these guidelines, the Director is required to promptly notify the Chair of the CGNC and the committee will review the facts and circumstances and determine whether such
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service would interfere with the Director’s ability to devote sufficient time to fulfilling the Director’s responsibilities to the Company.  Currently, none of the Directors serve on more than three public company boards, including the Sleep Number Board.

Chief Executive Officer Service on Other Boards.  The Chief Executive Officer may not serve on more than one public company board other than the Sleep Number Board of Directors.

Board and Committee Evaluations.  The Board believes that the Company’s governance and the Board’s effectiveness can be continually improved through evaluation of both the Board as a whole and its committees.  The CGNC is responsible for overseeing the annual evaluation of the Board’s effectiveness in these areas and reviewing the results and recommendations for improvement with the full Board.  The evaluation process includes an annual self-evaluation of the Board and its committees, as well as periodic individual director evaluations.  The CGNC retains an independent third party from time to time to manage the evaluation process to ensure that it remains as thorough and transparent as possible.

Board Executive Sessions.  Executive sessions or meetings of independent Directors without management present will be held at least twice each year.  At least one session will be to review the performance criteria applicable to the Chief Executive Officer and other executive officers, the performance of the Chief Executive Officer against such criteria and the compensation of the Chief Executive Officer and other executive officers.  Additional executive sessions or meetings of independent Directors may be held from time-to-time as required.  The Board’s practice is to meet in executive session for a portion of each regularly scheduled meeting of the Board.  Any member of the Board may request at any time an executive session without the presence of management.  Executive sessions or meetings with the Chief Executive Officer shall be held from time-to-time for a general discussion of relevant topics.

Paid Consulting Arrangements.  The Board believes that the Company should not enter into paid consulting arrangements with independent Directors.

Board Compensation.  Board compensation should encourage alignment with shareholders’ interests and should be at a level equitable to comparable companies.  The Management Development and Compensation Committee is responsible for periodic assessments to assure these standards are being met.

Share Ownership Guidelines for Executive Officers and Directors.  The Board has established the stock ownership guidelines for executive officers and Directors as further described in the Compensation Discussion and Analysis beginning on page 26 of this Proxy Statement and as summarized below.
Executive Officer Ownership Guidelines.  The Chief Executive Officer is expected to achieve and maintain stock ownership equal to five times the Chief Executive Officer’s base salary and each of the other executive officers is expected to achieve and maintain stock ownership equal to three times the executive officer’s base salary.  The executive officers are required to retain at least 50% of net shares after taxes from any grant until such time as the guideline is met.
Board Ownership Guidelines.  Within five years of joining the Company’s Board of Directors, each Director is expected to achieve and maintain stock ownership equal to five times the Director’s annual cash retainer.  Any Director who has not achieved the foregoing ownership objective by the required time period will not be permitted to sell any shares except to the extent required to pay the exercise price, transaction costs and taxes applicable to the exercise of stock options or the vesting of restricted shares.  Exceptions to these restrictions on sale of shares may be granted by the Board in its sole discretion for good cause shown by any Director.

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Prohibition of Hedging or Pledging of Shares.  Under our policy with respect to trading in the Company’s securities, Directors, officers, director-level and above team members and other team members designated by Sleep Number from time to time as “insiders” are prohibited from engaging in any form of hedging or monetization transactions involving the Company’s securities, including, but not limited to, the use of financial instruments such as prepaid variable forwards, equity swaps, collars and exchange funds.  In addition, insiders are prohibited from engaging in short sales of the Company’s securities and from trading in any form of publicly traded options, puts, calls or other derivatives of the Company’s securities.  Insiders are also prohibited from engaging in any form of pledging of the Company’s securities, including (i) purchasing Company securities on margin; (ii) holding Company securities in any account which has a margin debt balance; (iii) borrowing against any account in which Company securities are held; or (iv) pledging Company securities as collateral for a loan.

Conflicts of Interest.  Directors are expected to avoid any action, position or interest which conflicts with an interest of the Company, or that gives the appearance of a conflict.  If any member of the Board becomes aware of any such conflicting or potentially conflicting interest involving any member of the Board, the Director should immediately bring such information to the attention of the Chairman of the Board, the Chief Executive Officer and the Chief Legal and Risk Officer of the Company.

Performance Goals and Evaluation.  The Management Development and Compensation Committee is responsible for establishing the procedures for setting annual and long-term performance goals for the Chief Executive Officer and for the evaluation by the full Board of his or her performance against such goals.  The Management Development and Compensation Committee meets at least annually with the Chief Executive Officer to receive his or her recommendations concerning such goals.  Both the annual goals and the annual performance evaluation of the Chief Executive Officer are reviewed and discussed by the independent Directors at a meeting or executive session of that group.  The Management Development and Compensation Committee is also responsible for setting annual and long-term performance goals and compensation for the other executive officers whom report directly to the Chief Executive Officer.

Compensation Philosophy. The Management Development and Compensation Committee annually reviews the Company’s compensation philosophy and approach. The Board, through the Management Development and Compensation Committee, supports and oversees team member compensation programs that are closely linked to superior business performance and designed to support our long-term strategic orientation.

Senior Management Depth and Development.  The Chief Executive Officer reports to the Board, at least annually, on senior management depth and development, including a discussion of assessments, leadership development, succession planning and other relevant factors.

Provisions Applicable to Unsolicited Takeover Attempts or Proposals.  The Board will periodically review (not less often than every three years) the Company’s Third Restated Articles of Incorporation and Bylaws and various provisions that are designed to maximize shareholder value in the event of an unsolicited takeover attempt or proposal.  Such review includes consideration of matters such as the Company’s state of incorporation, whether the Company should opt in or out of applicable control share acquisition or business combination statutes, and provisions such as the Company’s classified Board structure.  The objective of this review is to maintain a proper balance of provisions that will not deter bona fide proposals from coming before the Board and that will position the Board and the Company to maximize the long-term value of our Company for all shareholders.

Shareholder Approval of Equity-Based Compensation Plans.  Shareholder approval will be sought for all equity-based compensation plans.
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Corporate Responsibility and Sustainability
At Sleep Number, our purpose is to improve the health and wellbeing of society through higher quality sleep. This purpose, combined with our culture of individuality and wellbeing – and our values of passion, integrity, innovation, courage and teamwork – are fundamental to our business strategy and community engagement. By investing strategically in sleep science-based innovation, digital technologies and our mission-driven team, we have built a beloved brand that has improved 13 million lives while delivering superior value for our stakeholders.

Better quality sleep has the power to transform lives by strengthening individuals’ resilience, increasing productivity and performance and improving health and wellness. As a purpose driven company and leader in sleep innovation, we are committed to creating a world that’s healthier, kinder and more connected and making a positive impact on customers, communities, team members, shareholders and the world we all share. In 2020, Sleep Number became a signatory to the United Nations Global Compact (UNGC), demonstrating our support for the Ten Principles related to human rights, labor, environment and anti-corruption. We are dedicated to making the UNGC principles part of our strategy, culture, day-to-day operations and enterprise-wide approach to measure, advance and report on our environmental, social and governance (ESG) initiatives.

Leadership. Our management team is responsible for leading the Company’s ESG strategy, initiatives and results. Our Board is responsible for overseeing the Company’s ESG approach. The senior management team engages with the entire Board, and each of the three standing Board committees in ESG discussions annually, quarterly and on an interim basis, as appropriate. These discussions include: environmental impact, such as those related to carbon, climate, natural resources, waste and toxicity; social matters and talent management initiatives, such as team member engagement, wellbeing, diversity, equity and inclusion; and governance and audit topics, such as succession planning, executive compensation, cybersecurity, enterprise risk assessment, corporate policy development, internal controls and investor outreach.

Team. Our team is highly engaged and dedicated to our mission of improving lives by individualizing sleep experiences. We celebrate individuality in each other, in our own lives and in our customers’ lives. We strive to embrace every individual’s unique talents, perspectives and experiences, as we create an environment where we can be our best selves. Valuing diversity, equity and inclusion makes us stronger, smarter and fuels our innovation and teamwork. Individuality connects us to our vision of becoming one of the world’s most beloved brands by delivering an unparalleled sleep experience. To further contribute to our teams’ well-being, we gifted a 360® smart bed to each of our 4,700 team members, demonstrating our commitment to their health and wellness.

Communities. Every day, we educate consumers on the importance of sleep and its vital connection to overall health and wellness, inspiring them to make sleep a priority in their lives. Because quality sleep is essential to a healthier and happier society, we are committed to helping future generations benefit from better sleep. We are halfway to achieving our commitment of improving the wellbeing of more than 1 million young people by 2025 through our partnerships with leading national organizations focused on youth health and wellness initiatives. We also extended our partnerships with leading nonprofit organizations to support individuals and families in our communities who were deeply affected by the pandemic and have been impacted by social injustice.

Suppliers and Business Partners. We strive to do business with suppliers and business partners who share our values and support our mission. We communicate our Code of Conduct for Business Partners to all active suppliers and require them to acknowledge their commitment to it. This Code of Conduct for Business Partners articulates our expectations related to labor and human rights, health and safety, environmental issues, ethics and compliance with related laws, rules and regulations, and describes our rights to monitor and enforce supplier compliance. Sleep Number provides team members and management who have direct responsibility for supply chain management with training on matters within
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the scope of the Code and monitors suppliers’ compliance with our standards and the Code through both formal audits and informal visits.

Environment. We are committed to being a good steward of the environment, as we work to better understand and reduce the impact of our manufacturing, supply chain and retail operations and our products throughout their life cycles. While we have incorporated practices and policies into our business for years, we recognize that we have an opportunity – and responsibility – to elevate our commitment and prioritize initiatives that align with our values, benefit the environment and contribute to our financial results. We have implemented programs that divert landfill waste through reuse and recycling, reduce energy consumption in our buildings and more effectively manage the environmental impact of our logistics through optimal routing and fuel efficiency. We are also initiating efforts to better measure and report our impact.

Corporate Responsibility and Sustainability Report. We recently published our 2021 Corporate Responsibility and Sustainability Report, which provides information about our social, environmental and governance practices and priorities. The report underscores our strong commitment to well-being and our culture of diversity, inclusion and respect; our long-standing enterprise position on human rights; our disciplined focus on product quality; our progress and goals to reduce our environmental impact; and our high expectations for integrity and sound judgment from our team, suppliers and business partners. A copy of the Corporate Responsibility and Sustainability Report is included in our Investor Relations section of our website at http://ir.sleepnumber.com. The information contained in or connected to our website and our Corporate Responsibility and Sustainability Report is not incorporated by reference into or considered a part of this Proxy Statement.

Code of Business Conduct
We are committed to the highest standards of ethical business practices throughout our Company. Our Company values, team member training, Company policies and culture underscore our expectations for integrity and provide clear guidelines for business decisions and behavior.

We have a Code of Business Conduct, provided to all team members, which addresses legal and ethical issues that may be encountered by our team members during their normal course of business.  The Code of Business Conduct is reviewed annually with the Audit Committee and instructs and requires that our team members comply with applicable laws, engage in ethical and safe conduct in our work environment, avoid conflicts of interests, conduct our business with integrity and high ethical standards and safeguard our Company’s assets. 

Team members are required to report any conduct that they believe in good faith violates our Code of Business Conduct.  The Code of Business Conduct also sets forth procedures under which team members or others may report through our management team and, ultimately, directly to our Audit Committee (confidentially and anonymously, if so desired) any questions or concerns regarding accounting, internal accounting controls or auditing matters.
All of our team members are required to periodically certify their commitment to abide by our Code of Business Conduct.  We regularly monitor compliance with the Code of Business Conduct and report findings to our Audit Committee.  We also provide training in key areas covered by the Code of Business Conduct to help our team members to comply with their obligations.

A copy of the Code of Business Conduct is included in our Investor Relations section of our website at http://ir.sleepnumber.com.  We intend to disclose any amendments to and any waivers from a provision of our Code of Business Conduct on our website.  The information contained in or connected to our website and our Code of Business Conduct is not incorporated by reference into or considered a part of this Proxy Statement.
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Related-Party Transactions Policy
The Board of Directors has adopted a written policy intended to ensure the proper approval and reporting of transactions between the Company and any of its Directors, nominees for Director, executive officers or significant shareholders or entities or persons related to them that would be required to be disclosed by the Company pursuant to Item 404 or Regulation S-K of the Federal securities laws.  Under this policy, any proposed or existing related party transaction is subject to the approval or ratification of the Corporate Governance and Nominating Committee.  A copy of the Related Party Transactions Policy can be accessed through our Investor Relations website at http://ir.sleepnumber.com.  The information contained in or connected to our website is not incorporated by reference into or considered a part of this Proxy Statement.  There were no related-party transactions during the year ended January 2, 2021 and there are none currently contemplated.
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header4-execcomp1.jpg



COMPENSATION COMMITTEE REPORT
The Management Development and Compensation Committee of the Board of Directors (the Committee), consisting entirely of independent Directors, has reviewed and discussed the following Compensation Discussion and Analysis with management, and based on this review and discussion, the Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement. 

The Management Development and Compensation Committee

Brenda J. Lauderback, Chair
Daniel I. Alegre
Michael J. Harrison
Kathleen L. Nedorostek

COMPENSATION DISCUSSION AND ANALYSIS

Table of Contents






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Introduction
The Compensation Discussion and Analysis (CD&A) describes our executive compensation program, including the objectives and elements of compensation as well as determinations made by the Committee regarding our named executive officers (NEOs). 

For 2020, the following five executive officers were determined to be NEOs as a result of their position during the year as chief executive officer (CEO), or chief financial officer (CFO), or their total compensation making them among the three other highest paid executives for the fiscal year.

NamePosition Title
Shelly R. IbachPresident and Chief Executive Officer (CEO)
David R. CallenExecutive Vice President and Chief Financial Officer (CFO)
Andrea L. BloomquistExecutive Vice President and Chief Innovation Officer
Melissa BarraExecutive Vice President and Chief Sales and Services Officer
Kevin K. BrownExecutive Vice President and Chief Marketing Officer


Purpose Driven Company
Proven quality sleep is vital to health and wellness. Its life changing benefits strengthen our resilience and increase our productivity and performance.

Guided by this knowledge and a deep commitment to our culture of individuality and wellbeing, Sleep Number has, for years, invested in science-based sleep innovation, digital technologies, an agile go-to-market strategy and our brand experience. We have positioned digital health at the core of our product and customer experience and built a beloved brand that has improved more than 13 million lives.

Throughout 2020, as the global pandemic and a heightened focus on racial injustice highlighted our connection to, and dependence on, one another, our purpose – to improve the health and wellbeing of society through higher quality sleep – sustained and inspired us. Consumers engaged with our brand at record levels, embracing our revolutionary 360® smart beds which deliver proven quality sleep. We leveraged the power of our differentiated consumer strategy and vertically integrated business model to ensure a safer, healthier and more equitable world.

While the global pandemic significantly disrupted operations in 2020, it also proved that authentic purpose, a diverse, equitable, inclusive culture and good business deliver significant value to all stakeholders. Our passionate, mission driven team reimagined and reinvented the way we work, allowing us to continue serving our customers while remaining safe. Our resolute belief in the life-changing impact of quality sleep, the lasting engagement we create with our customers and the scaling of our sleep science-based innovations enabled Sleep Number to deliver superior shareholder value and continues to position us for sustainable profitable growth.

2020 Performance and Accomplishments
In a year of challenge and change, we delivered exceptional results in 2020 by leveraging the power of vertical integration, digitization and a mission-driven, highly engaged team. The groundwork for our 2020 performance began years ago with an understanding that quality sleep is highly correlated with health and wellbeing. This strategic clarity, reinforced by disciplined investment to strengthen our competitive advantages and growth drivers, has resulted in sustainable, profitable growth, including a 5-year CAGR of 9% in net sales, 15% in adjusted EBITDA and 38% in EPS. This included performance in 2020 that meaningfully exceeded our plans and street consensus expectations. Consumer demand for our revolutionary 360 smart beds accelerated in the back half of 2020 and momentum continues. Since
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transitioning to all smart beds in Q3 2018, over ten quarters ago, demand for our smart beds has grown an average of 12%. Highlights of our full year financial results include:

Record net sales of $1.86 billion (+9%) with positive comp sales for the seventh consecutive year
Net operating profit (NOP) increased 65% versus the prior year to $184.9 million and adjusted EBITDA grew 41% to $267.9 million, while continuing to prioritize strategic investments that are fueling our profitable growth
EPS increased 81% to a record $4.90
Operating cash flow grew 48% to $280 million with $37 million in capital expenditures and $228 million invested to repurchase Sleep Number stock (share repurchases totaled $928 million over the last five years compared with $925 million cash from operation over that same period)
Fiscal 2020 included a 53rd week, which we estimate added approximately $41 million in sales, $11.2 million in operating income and $0.30 of diluted earnings per share
Return on invested capital (ROIC) of 25.0%, grew 720 basis points, up 14 points in five years
Performance metrics in our
compensation program:
Long-Term Incentive Plan
Net Sales growth
NOP growth
ROIC
Share price
Annual Incentive Plan
Adjusted EBITDA

performanceacceleratedby36.jpg
Note: For additional information on our non-GAAP financial measures, such as adjusted EBITDA and ROIC, and their reconciliation to operating income and net income, as applicable, see “Non-GAAP Data Reconciliations” on pages 26 and 27 of our Annual Report on Form 10-K filed on March 2, 2021.
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Total shareholder return (TSR) for one, three and five years was in the top quartile of our peer companies (as described on page 44) for fiscal year 2020 (SNBR ending stock price of $81.86 on December 31, 2020) with a 5-year TSR of 282%, or over 683% if measured for the five years ending on February 26, 2021 (SNBR ending stock price of $137.13).
chart-ef6533cfeae54b7b9a71.jpg
5-YEAR TSR
(12/31/2015-
12/31/2020)
3-YEAR TSR
(12/29/2017-
12/31/2020)
1-YEAR TSR
(12/27/2019-
12/31/2020)

We remain committed to investing in initiatives that strengthen our competitive advantages and deliver meaningful value for our team, customers and communities. We expect our advantaged and efficient business model, combined with near- and long-term investments, will continue to deliver long-term superior value for all of our stakeholders.

Other Accomplishments. The Company excelled strategically and financially in 2020. Sleep Number was the recipient of multiple awards, recognized as a sleep, wellness and experience innovator, in addition to achieving excellence in product design, and a supply chain to admire. The Climate360™ smart bed received the prestigious CES 2020 “Best of Innovation” award and was selected as CES Innovation Honorees across Health & Wellness and Tech for a Better World categories. The 360 smart beds were selected as CES 2020 Innovation Honorees in three categories: Smart Home, Health & Wellness and Tech for a Better World. These are just a few of the many awards and recognition the Company received in 2020.

Other highlights:
Improved 13 million lives to date with our life-changing sleep experience
Extending sleep leadership with over 1 billion sleep sessions and over 9 billion hours of longitudinal data
Strategic partnerships including our renowned Sleep Scientific Advisory Board and collaboration with Mayo Clinic
Advancing our culture of individuality and wellbeing with a deepening commitment to Diversity, Equity and Inclusion (DEI), the formation of a DEI Council, and progress on wellness initiatives
Community leadership with non-profit organizations to support wellbeing, including Make-A-Wish, National Urban League, CEOs Against Cancer and Strategic Talent Partners
Joining the UN Global Compact and adopting their 10 guiding principles on human rights, labor environment and anti-corruption

Refer to our Annual Report on Form 10-K filed on March 2, 2021 and our 2021 Corporate Responsibility and Sustainability Report, posted within the Investor Relations section of our company website, for additional information on these and other accomplishments in 2020. The information contained in our Corporate Responsibility and Sustainability Report is not incorporated by reference into or considered a part of this Proxy Statement.
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Pay and Performance Alignment
The letter to shareholders from our CEO in this Proxy Statement and the section “2020 Performance and Accomplishments” provides highlights of our performance for the year.  The following is a summary of our Company performance that determined the actual payouts earned for our 2020 AIP and 2018 Performance Stock Units (PSUs).  The performance and payouts for these incentive programs are described in more detail later in this CD&A.

ElementPerformance AchievedPayout
2018 PSUs (performance period of fiscal years 2018 through 2020)
Annual net sales growth rates of 6.0%, 10.9% and 9.3% were above target of 5% in all three years
Annual NOP growth for 2019 at 21.3% and 2020 at 64.9% were above maximum. Our below-threshold NOP growth for 2018 was primarily due to significant investments in our business that propelled performance in subsequent years
Average ROIC premium vs. weighted average cost of capital (WACC) was 168%, well in excess of threshold
Total shareholder return (TSR) was 118% for the three-year performance period through fiscal 2020 (share price increased from $37.59 to $81.86)
143.4% of target earned
(153.5% of target on net sales growth and 133.3% of target on NOP growth).
Compares with 128.5% of target earned for 2017 PSUs
2020 AIP
Adjusted EBITDA for 2020 was $267.9 million (+41% or +$77.5 million vs. 2019 and 130% of the 2020 AIP goal for target payout)
250% of target earned.
Compares with 128.3% of target earned for 2019 AIP

Pay earned for 2020 again demonstrates that when the Company exceeds its goals, payouts are above target. The following chart illustrates the value at the end of 2020 of a hypothetical $100 invested at the beginning of 2018, demonstrating the alignment between our incentive payouts and shareholder experience over the three-year period.chart-d151b034ef0e4e7a9081.jpg
2018 AIP
Performance: 90% of goal
Payout: 53.5% of target
2019 AIP
Performance: 106% of goal
Payout: 128.3% of target
2020 AIP
Performance: 130% of goal
Payout: 250% of target
2018 PSUs
Net sales growth = 153.5% of target and NOP growth = 133.3% of target
Payout: 143.4% of target, with TSR of 118% for the three years

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Response to COVID-19 Pandemic
At the onset of the pandemic, we developed guiding principles to inform our actions to address the COVID-19 pandemic which included taking a balanced view of what is right for both team members and stakeholders and being equitable in our approach. In the midst of the pandemic, our purpose was our guiding light. The safety and wellbeing of our team members, serving our customers and ensuring business continuity were our priorities. This balanced view guided our decisions as we implemented significant actions to preserve cash and reduce operating costs. The impacts of these decisions were felt at all levels -- delaying merit increases for executive officers (but not for all other team members), furloughing nearly 40% of our team members, reducing hours and suspending numerous benefits including our 401(k) match. As business conditions improved during the year, we were able to bring back many of our furloughed team members, reinstate benefits that had been suspended and invest more than $11 million (retail value) in gifting a new 360 smart bed to all of our 4,700 team members to support their wellbeing. We also made a special contribution to our team members to make up for the 401(k) match that was missed and increased the incentive payout for our furloughed team members participating in the Annual Incentive Plan to adjust for the impact of the furlough on their AIP earnings for 2020. These are just a few examples of our balanced and equitable approach in response to the COVID-19 pandemic. We recognize that we could not have achieved these exceptional results for 2020 without the sacrifices, agility, resilience and innovation of our entire team.

Compensation Actions
Each March, the Committee considers market data provided by its independent consultant and other factors when setting the base pay and target incentive opportunities for our executive officers. The Committee generally seeks to align the target direct compensation opportunity within a competitive range of the market median (our approach to benchmarking is described in more detail on page 44).

Given the significant weight our executive compensation program places on at-risk and performance-based incentive opportunities, the compensation realized by our executive officers will vary significantly depending on Company performance against pre-determined goals and changes in share price, an important design objective of our executive compensation program.

Base Salary
We set base salaries for our executive officers to be competitive and to allow us to attract and retain top executive talent.  Base salaries represent 14% of the CEO’s target total direct compensation and 29% on average for our other NEOs. Our Committee reviews base salaries annually, considering market data and both individual and Company performance when making base pay decisions. At its meeting on March 5, 2020, the Committee approved the base salary adjustments effective March 22, 2020 shown in the following table. In response to the pandemic, these adjustments were delayed until December 2020, as explained in the footnote to the table below. The NEOs including the CEO received base salary adjustments that considered their performance and market position.

NameBase Salary at
March 24, 2019
(Annualized)
Base Salary at
March 22, 2020
(Annualized)
Shelly R. Ibach$1,000,000$1,100,000
David R. Callen$508,019$533,420
Andrea L. Bloomquist$454,010$481,250
Melissa Barra$456,637$479,469
Kevin K. Brown$444,071$470,715
Note: The base salary adjustments approved by the Committee in March 2020 were scheduled to start with the pay period beginning March 22, 2020. In response to the impact of the pandemic, our executive officers agreed to delay the payment of this salary adjustment until December 2020. On December 24, 2020 our executives received a lump sum payment equal to the value of their salary adjustment that would have been paid from the
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effective date of March 22, 2020. The annualized base salary amounts shown above were put in place effective for the pay period starting December 27, 2020. See also “2020 Salary for Stock Offering” below for a discussion of salary amounts that were taken in the form of RSU awards.

Annual Incentive Plan (AIP)

Design Overview. All 4,700 Sleep Number team members participate in some type of a variable pay program as part of our compensation philosophy to create alignment between pay and performance. Our AIP provides our executive officers and more than 1,600 of our team members not covered by other variable pay programs with an annual incentive opportunity contingent upon our adjusted EBITDA performance. Adjusted EBITDA is a useful indicator of our annual financial performance and our ability to generate cash flow from operating activities, which we believe to be an important source of our shareholder value creation. We define adjusted EBITDA as net income plus: income tax expense, interest expense, depreciation and amortization, stock-based compensation expense and asset impairments (as detailed in our quarterly and annual financial filings). For additional information on adjusted EBITDA, including a reconciliation to net income see “Non-GAAP Data Reconciliations” on page 26 of our Annual Report on Form 10-K filed on March 2, 2021.

The design of our AIP has two main components that determine the amount of the payout earned by our NEOs for Company performance. First is the executive officer’s target incentive opportunity, which is set each year by the Committee considering market data and their position within the Company. The other component is Company performance measured against goals for adjusted EBITDA that determine the percent of the target payout earned for the year. It is the combination of these two components that results in the final AIP payout for our NEOs.

AIP Target
Incentive
Opportunity
X% of Target Payout
(earned for adjusted EBITDA
performance vs. goals)
=AIP Payout
for 2020

Our AIP includes an opportunity to receive a progress payment if a first-half performance goal for adjusted EBITDA is achieved or exceeded.  The progress payment is equal to half of the AIP target incentive for the first half of the year.  If the progress payment is earned and paid out in July of the fiscal year, it is subtracted from the annual payout earned and paid out following the end of the fiscal year in February.  By having this opportunity for a progress payment in our AIP, it reinforces the importance of starting out the year with strong first half performance.

Individual Target Incentive.  Each executive officer has a target incentive that is expressed as a percent of the actual base salary earned for the fiscal year. The Committee reviews these targets annually to ensure that they are aligned within a competitive range of the median target incentives and total cash opportunities of our peers and the market (our peer group and approach to benchmarking is described on page 44). The Committee approved the following changes in target annual incentives effective on March 22, 2020, to improve our market position on this performance-based element of the total direct compensation opportunity. For the NEOs other than our CEO, the change was also in recognition of their promotion during 2020 to Executive Vice President. The weighted average target incentive for 2020 is based on the number of days in the fiscal year that the AIP target incentive was effective, as shown below.

AIP Target Incentive (% of Actual Base Salary Earned)
NameAIP Target from 12/29/2019 to 3/21/2020AIP Target from
3/22/2020 to 1/2/2021
Weighted Average
AIP Target
for 2020
Shelly R. Ibach120%130%127.7%
Other NEOs55%70%66.6%
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2020 Performance Goals.  The Committee approved the following performance goals and range of payout opportunity for the 2020 AIP.  These goals and payout opportunities were set to provide a strong motivation for achievement of stretch performance objectives and a reasonable sharing rate of incremental adjusted EBITDA.  The following is an overview of the goals and payout levels that were approved for the 2020 AIP:
Target.  The performance goal for the target payout of 100% was set at adjusted EBITDA of $205.6 million, an 8% increase over 2019 actual of $190.4 million.  This was equal to the Company’s Annual Operating Plan (AOP) for 2020. When this goal was set, it represented above median performance compared to the three-year historical growth rate in EBITDA of our peer companies.
Maximum.  The performance goal for the maximum payout of 250% was set at adjusted EBITDA of $267.3 million, which was 30% above AOP and a 40% increase over 2019 actual. The 250% payout opportunity is designed to reward breakthrough performance and is a level of upside opportunity that is consistent with prior year plans.
Threshold.  The performance goal for the threshold payout of 40% was set at adjusted EBITDA of $174.7 million, which was 15% below AOP and 8% below 2019 actual. This represented an appropriate starting point for the threshold payout and was aligned with the approach taken by many of our peers and other similarly sized companies.

AIP Payout
(% of Target)
Annual Adjusted EBITDA Goals
(in millions)
% of AOP Achieved % Change vs. 2019 Actual
Threshold40%$174.785%(8)%
Target100%$205.6100%8%
Maximum250%$267.3130%40%

For the progress payment opportunity, the Committee approved a first half goal for 2020 of $85.3 million in adjusted EBITDA.  The first half goal for 2020 represented our first half AOP aligned with the annual AIP goal for target payout of $205.6 million.

2020 PerformanceOur adjusted EBITDA for 2020 was $267.9 million, up 41% over 2019 and 130% of the Company’s AOP which was the goal for target payout. For this level of 2020 adjusted EBITDA, we exceeded the goal for maximum payout of $267.3 million and as a result, earned an AIP payout of 250% of target. The Committee approved this payout, as it was determined based on the approved performance goals for the 2020 AIP and represented an exceptional performance despite the many challenges the Company faced with the pandemic. No adjustment was made for the impact of COVID-19 in this determination of the AIP payout for 2020. This payout was also reflective of our pay and performance alignment.

AIP Payout
(% of Target)
Adjusted EBITDA
(in millions)
% of AOP Achieved% Change vs. 2019 Actual
Actual250.0%$267.9130%+41%

Our first half adjusted EBITDA was $78.6 million, which was below the goal of $85.3 million in order to earn a progress payment for the 2020 AIP.  As a result, there was no progress payment made to NEOs and participants in the AIP in July 2020.

2020 Payout The following table shows the actual 2020 AIP total payout for each NEO based on their actual base salary earned for 2020, their weighted average target incentive opportunity and the approved payout of 250% of target.
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There was no progress payment made for the first half of 2020, so the AIP total payout amounts shown below were paid out on February 22, 2021.

Name
Base Salary
Earned (1)
Weighted Average AIP Target
(% of Salary)
2020 AIP Payout Earned
(% of Target)
2020 AIP
Payout
Earned
Shelly R. Ibach$1,076,923127.7%250%$3,439,043
David R. Callen$527,55866.6%250%$878,434
Andrea L. Bloomquist$474,96466.6%250%$790,860
Melissa Barra$474,20066.6%250%$789,588
Kevin K. Brown$464,56666.6%250%$773,547
(1) This represents the total base salary that was earned for the 26 pay periods of 2020, including the amount of the temporary salary reduction that was elected by the executive as part of the Salary for Stock Offering, as described on page 36.

Long-Term Incentive Plan (LTI)

Design Overview LTI is the largest component of the total direct compensation opportunity for our executive officers.  It provides a reward opportunity that is directly aligned with the long-term interest of our shareholders.  As an incentive, there is only payout value if we achieve long-term Company performance goals or, for stock options, positive stock price appreciation.  The grants have multi-year vesting requirements which also assist in the retention of our executive team; considered especially important to executing a long-term oriented innovation strategy.

The design of our LTI includes two types of annual equity grants:  Performance Stock Units (PSUs) and Stock Options.  For 2020, our executive officers received an annual total LTI grant value that was split 75% in PSUs and 25% in Stock Options (same mix as the 2019 LTI grants).   This combination is all performance based and appropriately rewards our executive officers for achieving long-term profitable growth and the creation of shareholder value.

Total LTI
Grant
Value
X75%=
PSUs
(Target Grant Value)
}These LTI grants only have payout value if Company performance goals are achieved for PSUs or shareholder value is created for stock options
X25%=
Stock Options
(Grant Value)

As a condition of accepting any LTI grant, our executive officers agree to reasonable restrictions on their activities during and for a reasonable period of time after their respective termination of employment, including, but not limited to, the assignment of inventions, non-competition, non-solicitation, confidentiality and an agreement to arbitrate disputes.

2020 Stock Option Grants.  Stock options vest in three equal annual installments on each of the anniversaries following the grant date.  Their term expires 10 years after the grant date, provided they have not been exercised or cancelled earlier due to certain events, and their exercise price is equal to the closing trading price of the Company’s common stock on the grant date.

The number of stock options granted in 2020 was determined by dividing the option grant value (25% of the executive officer’s total LTI grant value) by the calculated grant date fair value per stock option.  In this calculation of the grant date option value, we derive a Black-Scholes value under generally accepted accounting principles, using a 20-day average stock price leading up to grant date in order to mitigate short-term stock price volatility. See the footnotes to the “Summary Compensation Table” and “Grants of Plan-Based Awards” for a description of how grant date fair value is determined for purposes of the disclosure in these tables.
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For stock options granted to our NEOs as part of our annual LTI award process on March 15, 2020, the 20-day average closing share price was $47.55, estimated Black-Scholes value per option was $19.50, and the option exercise price was $35.68.  For stock options also granted to Mr. Callen on December 15, 2020, the 20-day average closing share price was $73.29, estimated Black-Scholes value per option was $30.78, and the option exercise price was $88.76.

2020 PSU Grants.  PSUs become vested on the third anniversary of the grant date, and a percent of target is earned, provided performance exceeds established threshold goals, and paid out based on Company performance against annual growth goals over a three-year performance period.  The payout under the PSUs may be reduced based on an ROIC modifier (the modifier can only reduce a payout, not increase it).  The performance metrics for 2020 PSUs, which are the same metrics as the 2019 PSUs, are annual growth in net sales and NOP over fiscal years 2020, 2021 and 2022.  Prior to the grant date, the Committee established annual growth goals for each of the three years, considering the Company’s long-range strategic plan and historical performance of our peer group.  Performance against these annual growth goals will determine the percent of target payout earned for net sales and NOP for the entire performance period.  The annual measurement for either metric can range from 50% to 200% of target, with the threshold payout being 50% of target if the threshold performance goal is achieved.

At the end of the three-year performance period, the payout for PSUs is determined based on the average of the payouts earned for each of the three years in the performance period, with net sales and NOP equally weighted each year.  By assessing growth achieved each year relative to long-term growth goals, our executive officers are able to make the appropriate investments in the business during ever-changing market and competitive environments while prioritizing long-term sustainable profitable growth.

The final payout of the 2020 PSUs is subject to a ROIC modifier that can reduce the payout by up to 20%.  The reduction occurs if the three-year average basis points difference between ROIC and WACC for the 2020-2022 period is below a certain threshold established by the Committee prior to the grant date.  The ROIC modifier reduces the payout if capital investments in the business do not generate returns that are sufficiently above the WACC.

The following chart illustrates how the overall payout for 2020 PSUs, covering the 2020-2022 period, will be determined, which is the same design as the 2019 PSUs.

Net SalesNOP
2020Net sales
annual growth each year
% of target payout earned for net sales each year2020NOP
annual growth each year
% of target payout earned for NOP each year
20212021
20222022
Three-year average  % of target earned for net salesThree-year average  % of target earned for NOP

Overall payout:
Average of the % of target earned for net sales and NOP (equal weighting) times the target number of PSUs granted; then subject to a potential reduction of up to 20% if the difference between ROIC and WACC is below a certain threshold 

The target number of PSUs for the 2020 award was determined by dividing the grant value (equal to 75% of the executive officer’s total LTI grant value) by the estimated grant date fair value per share, which is calculated using 20-day average stock price leading up to grant date in order to mitigate short-term stock price volatility.  See the footnotes to the “Summary Compensation Table” and “Grants of Plan-Based Awards” for a description of how grant date fair value is determined for purposes of the disclosure in these tables.

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For PSUs granted to our NEOs as part of our annual LTI award process on March 15, 2020, the 20-day average closing share price was $47.55.  For PSUs also granted to Mr. Callen on December 15, 2020, the 20-day average price was $73.29.

2020 LTI Grant Values.  The Committee approves a total LTI grant value for each executive officer, considering the executive officer’s performance and level of responsibility, as well as the competitive position of the officer’s targeted total direct compensation.  The Committee seeks to make LTI grants to provide a total direct compensation opportunity that is within a competitive range of the market median.

The following table summarizes the LTI grants made to our NEOs in 2020, and the split in grant value between PSUs (75%) and Stock Options (25%).  The LTI grant value for Mr. Callen is the total value of PSU and Stock Option awards made during 2020, which occurred on March 15, 2020 as part of our annual LTI award process and on December 15, 2020 as a result of our regular mid-year review of executive officer compensation.  Mr. Callen is the only NEO who received an additional LTI award on December 15, 2020.  See “Grants of Plan-Based Awards” for more information on these awards.

NameActual LTI Grants during 2020 (Granted March 15, 2020 or December 15, 2020) *PSU grants only have payout value if Company performance goals are achieved.
PSU
Grant Value at Target
Stock Option Grant ValueTotal LTI
Grant Value
Shelly R. Ibach$3,937,500$1,312,500$5,250,000
Stock options only have value if shareholder value
is created.
David R. Callen$843,750$281,250$1,125,000
Andrea L. Bloomquist$600,000$200,000$800,000
Melissa Barra$581,250$193,750$775,000
Kevin K. Brown$525,000$175,000$700,000
The actual grant date fair value for these LTI grants as disclosed in the Summary Compensation Table varies from the amounts shown above due to valuation assumptions as described in the footnotes to the “Grants of Plan-Based Awards” table on page 46.

2020 Salary for Stock Offering. In response to the initial severity of the pandemic’s impact on our business and in an effort to preserve cash during an extremely uncertain period, the Committee approved on April 3, 2020 and also by written consent on April 10, 2020 the Salary for Stock Offering for executive officers and other leaders within the Company. Under this one-time program, executives were given an opportunity to voluntarily reduce their base salary over 18 pay periods from April 19, 2020 to December 26, 2020. Each executive elected a percent reduction of their salary that would have been paid over this time period. This was an irrevocable election made by a deadline of April 10, 2020. In exchange for participating, the executive received a time-vested Restricted Stock Unit (RSU) award with a grant value equal to the amount that their salary was reduced. The RSU award was granted on April 15, 2020, with the number of RSUs granted based on the 20-day average share price of $22.96. The RSU award was subject to vesting, becoming 100% vested on December 26, 2020. There was a special vesting provision that in the event that an executive terminated employment for any reason other than cause (as defined under the 2020 Equity Incentive Plan) prior to the vesting date, a pro-rata portion of the award would vest based on the portion of the vesting period that was worked.

The actual salary reduction amounts under the Salary for Stock Offering were as follows: for Ms. Ibach, $330,723; for Mr. Callen, $87,926; for Ms. Bloomquist, $7,857; for Ms. Barra, $158,066; and for Mr. Brown, $30,743. The actual grant date fair value for these RSU awards as disclosed in the Summary Compensation Table varies from the amounts shown above due to valuation assumptions as described in the footnotes to the “Grants of Plan-Based Awards” table on page 46. The “Grants of Plan-Based Awards” table also discloses the number of RSUs that were granted in connection with
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this offering. The vesting of these RSU awards is disclosed in the “Option Exercises and Stock Vested” table and footnotes on page 49.

2018 PSU Payout.  The 2018 PSUs covering the 2018-2020 period, which are similar in design as the 2020 PSUs, were granted on March 21, 2018 and vested and paid out on March 21, 2021 in the form of shares of common stock, less tax withholding settled in shares of common stock.  Based on net sales and NOP annual growth over the three fiscal years (2018, 2019 and 2020), the overall payout earned for this grant was 143.4% of target.  As described below, this was an average of the percent of target payout earned for growth in net sales and NOP in each of the three years covered by the award.  The ROIC modifier, which could have reduced this payout, did not apply. 

The following is a summary of how the 143.4% of target payout was determined for the 2018 PSUs, which is an average of what was earned for net sales and NOP growth (weighted equally). No adjustment was made for the impact of COVID-19 on 2020 results in this determination of the 2018 PSU payout.
Annual net sales growth of 6.0% for 2018, 10.9% for 2019, and 9.3% for 2020 were above the annual growth goal of 5% for target payout. The three-year average payout earned on net sales growth was 153.5% of target.
Annual NOP growth of 21.3% for 2019 and 64.9% for 2020 were above the annual growth goal of 20% for maximum payout. Our NOP growth of 0.6% for 2018 was below the annual growth goal for threshold payout. This was primarily due to the impact during this period of making strategic investment in growth enablers and growth drivers. The three-year average payout earned on NOP growth was 133.3% of target.
Average ROIC premium vs. WACC of 168% exceeded the 30% premium threshold, so the ROIC modifier did not apply.

TSR was 118% for the performance period, which increased the value for shares that were earned and paid out.

The following are the annual growth goals that were established for the 2018 PSU grant.

% of Target PayoutAnnual Growth in
Net Sales
Annual Growth in NOPAverage % Difference Between
ROIC and WACC
% Reduction in Target Number of RSUs
Threshold50%3%4%30.0% or greaterNo reduction
Target100%5%9%20.0% - 29.9%-5%
Maximum200%12%20%10.0% - 19.9%-10%
0.1% - 9.9%-15%
0% or lower-20%

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The following charts show the actual performance achieved for the performance period and how the total payout of 143.4% of target was determined.

Net Sales ($M)% Annual Growth% of Target PayoutNOP
($M)
% Annual Growth% of Target Payout
2018$1,5326.0%115%$92.40.6%—%
2019$1,69810.9%184%$112.121.3%200%
2020$1,8579.3%162%$184.964.9%200%
Three-year average:153.5%Three-year average:133.3%

Total payout:  143.4% of target
(equal weighting of average payout earned on Net Sales and NOP)

ROICWACCROIC Premium vs. WACC
201816.0%8.9%80%
201917.8%7.4%141%
202025.0%6.5%285%
Three-year average:168%

ROIC modifier was not applied to this payout
(Three-year average premium of 168% was above the threshold of 30%)

Compensation Philosophy and Approach
Our executive compensation program is designed to support our long-term strategic orientation.  It is competitive, heavily weighted toward performance-based incentive programs and allows for appropriate risk taking and investments in the business as we execute our consumer innovation strategy.  Our incentive programs reward our executive officers for superior performance to deliver sustainable, profitable growth.  The incentive opportunities are tied to multiple financial metrics that support our business strategy and are aligned with shareholder interests.

Our executive compensation program is designed to:
Motivate and retain a talented management team to achieve superior Company performance that is sustainable over time
Provide a market competitive total compensation opportunity that is predominantly performance based and at risk
Reward executives for achieving financial performance goals and creating stakeholder value
Reinforce our philosophy of pay for performance with opportunities to earn above median compensation for performance that exceeds goals

Shareholders have expressed their support of our executive compensation program and its alignment with Company performance.  Over the last five years (2016-2020), an average of 95% of votes cast by shareholders were in support of our annual proposal to approve, on an advisory basis, the compensation of the Company’s NEOs.  We have maintained this strong support from our shareholders over time.  We have regular outreach discussions with shareholders to learn more about their perspectives. We regularly review and update our executive compensation program to ensure alignment with our objectives.  We also adhere to many governance best practices and policies.

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Compensation Program Overview
Our pay for performance compensation program has three main components that make up the total direct compensation opportunity for our executive officers, as summarized in the table below.  With the effectiveness of the program, there were no changes to the design of these elements of our compensation program for 2020.

ElementFormMetricsPerformance PeriodDescription
Long-Term Incentive Plan (LTI)Performance Stock Units (PSUs)
(75% of LTI Grant Value)
Net Sales Growth (50% Weighting)
NOP Growth
(50% Weighting)
ROIC Modifier
Share Price Growth
Three-year vesting and performance periodAnnual equity grant opportunity.  Payout can range from 50 to 200% of target, with no payout below threshold. Payout is based on net sales and NOP annual growth over the three-year performance period, subject to a potential reduction for an ROIC modifier. Value is tied to share price
Non-Qualified Stock
Options (NQSOs)
(25% of LTI Grant Value)
Share Price GrowthThree-year vesting period and ten-year termAnnual equity grant opportunity. Options only have value if future share price is higher than share price at time of grant
Annual Incentive Plan (AIP)CashAdjusted EBITDA (100% weighting)One year
Target annual incentive opportunity represents a percent of base salary earned. Payout can range from 40 to 250% of target, with no payout below threshold. Payout is based on adjusted EBITDA performance versus goals
Base SalaryCashn/an/aFixed pay component, reviewed annually and eligible for merit considering individual performance and positioning versus external benchmarks

By design, our executive compensation mix is heavily weighted toward performance-based incentive programs that only have value if Company performance meets or exceeds predetermined financial goals, or if shareholder value increases.  As highlighted in the charts below, over 85% of our CEO’s target total direct compensation opportunity is performance-based and fully at-risk; for our other NEOs, this percentage is over 70%.
chart-d194c7666ec24f3d9fd1.jpg
chart-51d486749cd943869c21.jpg

Our LTI and AIP are performance-based incentive programs that are tied to Company performance metrics aligned with shareholder interests.
Base:Fixed component
LTI:Net Sales, NOP, ROIC and share price
AIP:Adjusted EBITDA

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Other Elements of Compensation

Benefits.  Our executive officers participate in the benefit programs provided to our benefit eligible team members.  This includes Company provided medical, dental, basic life, short-term disability, long-term disability and a matched 401(k) plan.  Our NEOs participate in the 401(k) plan on the same basis as all other team members.  Due to the pandemic, our 401(k) match was temporarily suspended for all participants from April 2020 to August 2020. The match was reinstated in September 2020, and the Company made a special contribution for the amount of match that was missed for 2020. There is no supplemental matching program, excess plan, or other executive retirement program.  The value of the 401(k) matching contribution made by the Company for our NEOs is included in “All Other Compensation” as disclosed in the “Summary Compensation Table” on page 45.

Non-Qualified Deferred Compensation Plan.  As described in more detail on page 49, our executive officers along with other leaders may elect to defer a portion of their salary, AIP payout and PSU/RSU payout under this non-qualified deferred compensation plan.  The Company does not make any contributions to this plan on behalf of participants.  The plan offers a range of investment options for the tracking of an investment return on the deferrals, and participants can elect how their deferrals will be distributed in the future.

Executive Benefits and Perquisites.  Consistent with our commitment to emphasize pay for performance in our mix of total compensation, our executive officers receive very few executive benefits and perquisites.  The Company provides two perquisites to our executive officers:  financial counseling and an annual executive physical exam.  The annual limit for financial counseling is $15,000 for our CEO and $8,000 for our other NEOs.  This annual limit was reduced by 50% for 2020 due to the pandemic, but was later reinstated to the full annual amount for 2020. The Company pays for the cost after insurance coverage of an annual executive physical exam.  Amounts reimbursed for financial counseling or the executive physical exam are fully taxable to the executive and there is no “gross up” by the Company to cover these taxes for the executive. In 2020, the Committee approved the payment of certain security enhancements for our CEO that were recommended as part of a security study conducted by an independent third party consultant. The amount paid for by the Company in 2020 that was included in the “All Other Compensation” column of the “Summary Compensation Table” on page 45 was $29,040.

Employment Agreements.  We do not have employment agreements with any of our executive officers that provide for continued employment for any period of time.

Severance Plan.  Our executive officers and other key leaders of the Company participate in the Sleep Number Executive Severance Pay Plan.  This plan provides for severance pay, prorated AIP incentive and other benefits such as outplacement and limited COBRA reimbursement in the event of involuntary termination of employment not for cause or termination for good reason, including for events following a change-in-control, as those terms are defined in the plan.  This plan is described in more detail in the section labeled “Potential Payments Upon Termination or Change in Control” found on page 50.


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Compensation Governance, Practices and Policies
In order to meet the key objectives of our executive compensation program, the Company has adopted a strong corporate governance framework with the following practices and policies that ensure alignment with shareholder interests. There have been no changes to these policies or practices since the last disclosure in the 2020 Proxy Statement.

Compensation PracticeSleep Number Policy or Practice
Pay for performanceYesA significant percentage of the total direct compensation package is performance-based.
Robust stock ownership guidelinesYesExecutive officers and members of the Board of Directors are subject to stock ownership guidelines.
Annual shareholder “Say on Pay”YesWe value our shareholders’ input on our executive compensation programs. Our Board of Directors seeks an annual non-binding advisory vote from shareholders to approve the executive compensation disclosed in our CD&A, tabular disclosures and related narrative of this Proxy Statement.
Annual compensation risk assessmentYesA risk assessment of our compensation programs is performed on an annual basis.
Clawback provisionsYes
We have a Clawback and Forfeiture Policy that allows for recovery of incentive and performance-based compensation in the event of a material accounting restatement of our financial statements. There is also a clawback provision in the LTI award agreements that allows for the forfeiture and recovery of LTI granted, earned, vested or paid out if the participant violates a confidentiality agreement that must be accepted as a condition of receiving the LTI award.
Independent compensation consultantYesThe Committee retains an independent compensation consultant to advise on the executive compensation program and practices and assist in the benchmarking of compensation levels.
Double-trigger vestingYesIf outstanding LTI grants are assumed or substituted upon a change-in-control, the vesting of the LTI grants will only be accelerated if the executive is terminated without cause or terminates with good reason within two years of the change-in-control (i.e., “double trigger vesting”).
Hedging of Company stockNoMembers of the Board of Directors, executive officers, director-level and above team members, and other team members designated by the Company from time-to-time as insiders may not directly or indirectly engage in transactions intended to hedge or offset the market value of Sleep Number common stock owned by them.
Pledging of Company stockNoMembers of the Board of Directors, executive officers, director-level and above team members, and other team members designated by the Company from time-to-time as insiders may not directly or indirectly pledge Sleep Number common stock as collateral for any obligation.
Tax gross-upsNoWe do not provide tax gross-ups to our executive officers, other than for relocation benefits that are applied consistently for all team members.
LTI Grant Practices and Procedures PolicyYesWe have a policy that documents the practices and procedures for making LTI grants to eligible team members including executive officers.  This policy specifies approval procedures, timing of awards, and the award formulas that determine the number of options or RSUs granted.
Repricing of stock optionsNoOur equity incentive plan does not permit repricing of stock options without shareholder approval or the granting of stock options with an exercise price below fair market value.
Employment contractsNoNone of our NEOs has an employment contract that provides for continued employment for any period of time.

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Stock Ownership.  Encouraging stock ownership among our executive officers is critical in aligning their interests with those of our shareholders.  The Company has stock ownership guidelines in place for executive officers as well as for members of the Board of Directors.  The following is the value of share ownership that is expected at various levels under these guidelines:
5x base salary for CEO
3x base salary for executive officers (other than CEO) and
5x annual cash retainer for Board members

According to the guidelines, the stock ownership value includes:  shares owned outright, shares held in the Profit Sharing and 401(k) Plan or the Executive Deferral Plan, after tax intrinsic value of vested and outstanding stock options, after tax value of outstanding PSUs (prorated to the extent that any year of the performance period has been completed and the payout for that year is known).  Until the guideline is met, executives are required to hold 50% of the net shares from the vesting or payout of any LTI grant or from the exercise of stock options.  Directors are expected to achieve the guideline level of ownership within five years of their appointment to the Board. As of the end of fiscal year 2020, all of the NEOs and non-employee Directors were in compliance with the stock ownership guidelines.

Committee and Governance.  The Committee is comprised entirely of independent, non-employee Directors.  The key responsibilities of the Committee as outlined in its charter include:
Review and approve the Company’s compensation philosophy
Establish executive compensation structure and programs designed to motivate and reward superior Company performance
Lead the Board of Directors’ annual process to evaluate the performance of the CEO
Determine the composition and value of compensation for the CEO and other executive officers including base salaries, annual cash incentive awards, long-term equity-based awards, benefits and perquisites
Establish, administer, amend and terminate executive compensation and major team member benefit programs
Periodically review the Company’s objectives and programs for talent management, including initiatives focused on wellbeing and diversity, equity and inclusion
Assess management development progress and talent depth, organizational strategy, and succession planning for key leadership positions in the context of the Company’s strategic, operational and financial growth objectives
Establish structure and amount of non-employee Director compensation

The Committee usually meets five to six times per year, in person or by video conference.  The Chairman of the Board, our CEO, other members of our management team, and the Committee’s independent compensation consultant may be invited to attend all or a portion of a Committee meeting, depending on the nature of the agenda.  Also, the Committee consistently meets in executive session without members of management present.

Neither our CEO nor any other member of our management team votes on any matters before the Committee.  The Committee, however, solicits the views of our CEO on compensation matters, other than her own, and particularly with respect to the compensation of members of the senior management team reporting to the CEO.  The Committee also solicits the views of other members of senior management and the Company’s Human Resources leaders on topics related to key compensation elements and broad-based team member benefit plans.


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Role of Independent Compensation Consultant.  Under its charter, the Committee has the authority to retain and consult with independent advisors to assist in fulfilling their responsibilities and duties.  To maintain the independence of these advisors, use by the Company of any of these advisors for work other than that expressly commissioned by the Committee must be approved in advance by the Committee.

Since fiscal 2013, the Committee has retained Frederic W. Cook & Co., Inc. (FW Cook) as its independent compensation consultant.  At the Committee’s request each year, FW Cook certifies that it continues to be an independent advisor and discloses information in a letter to the Committee that demonstrates this independence.  The Committee assessed this certification and disclosure information and concluded that no conflict of interest or independence concerns exist in the engagement of FW Cook as the Committee’s independent compensation consultant.  In the course of its engagement, the independent compensation consultant:
Provides on-going assessment of each of the principal elements of the Company’s executive compensation program
Advises the Committee on the design of both the annual cash incentive plan and the long-term equity incentive program
Works with the Committee and representatives of senior management to assess and refine the Company’s peer group for ongoing comparative analysis purposes
Provides the Committee with updates related to regulatory and legislative matters
Reviews market data, trends and analyses based on proxy data for our peers and other data sources to inform executive compensation levels and design
Provides advice and guidance to the Committee on pay actions for executives

CEO Assessment Process.  The Committee evaluates Ms. Ibach’s performance by soliciting input from all members of the Board.  The Board also assesses Ms. Ibach’s performance against objectives incorporating key strategic and operational factors, including growth, profitability, product innovation, advancement of strategic initiatives, organizational development and investor relations.  The CEO performance feedback from all independent Board members is consolidated into a report which is the basis of a full Board discussion in Executive Session led by the Chair of the Committee.  The Board’s assessment of Ms. Ibach’s performance is a major consideration in determining any compensation adjustments for the coming year.

Compensation Risk Assessment.  Based on an annual risk assessment, the Company has determined that none of its compensation policies, practices or programs is reasonably likely to have a material adverse effect on the Company.  The results of this risk assessment were shared with the Committee.

Peer Group.  The Committee, in consultation with FW Cook, annually reviews the composition of the industry peer group to ensure that the included companies are appropriate in terms of size and business focus.  The selected peer group consists of publicly traded companies that are within a range of size compared to Sleep Number and involved in household/home furnishing, appliances, retail, or technology industries with a focus on products delivered direct to consumers.  The selection criteria also consider other factors such as whether the Company demonstrates high growth particularly through product development or market expansion or whether the Company has products or service driven through technology or innovation.   To ensure that our peer group includes companies of appropriate size and scope, we generally aim to select companies whose net sales and market capitalization are within a range of one-third to three times our own comparable metrics. 


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The following is the peer group approved by the Committee at its meeting on September 18, 2019 that was then utilized in the benchmarking reviewed by the Committee for compensation actions approved in March 2020 and described in this 2021 Proxy Statement:

Aaron’s, Inc.
Conn’s, Inc.
The Container Store Group, Inc.
Deckers Outdoor Corporation
Dolby Laboratories, Inc.
Ethan Allen Interiors Inc.
Haverty Furniture Companies Inc.
Herman Miller Inc.
iRobot Corporation
La-Z-Boy Incorporated
Leggett & Platt, Incorporated
Plantronics Inc.
RH
Steelcase Inc.
Steven Madden, Ltd.
Tempur Sealy International, Inc.

At its meeting on September 23, 2020, the Committee reviewed the peer group and made no changes.

Benchmarking.  With the assistance of FW Cook, the Committee considers market data on base salary, target total cash compensation and target total direct compensation when establishing compensation levels for executive officers.  The sources for this market comparison are from peer group pay data (most recent disclosures) and certain retail, technology or general industry surveys from third parties.  For each executive, we attempt to match as closely as possible our position to what is most comparable in our peers or the surveys.  This competitive analysis is just one factor considered when making pay decisions on base salary or incentive opportunities. 

The Committee generally seeks to align target total direct compensation opportunities within a competitive range of the market median, while providing opportunity for top quartile compensation for Company performance above established goals and below median compensation for performance below goal. Additionally, performance goals are set with consideration for peer group performance.

Tax Considerations.  We have historically considered the deductibility of executive compensation under Section 162(m) of the Internal Revenue Code in our design and operation of various incentive programs including AIP and LTI.  The Tax Cut and Jobs Act, signed into law on December 22, 2017 (the Tax Act), among other things, repealed the exemption from the $1 million compensation deduction limit under Section 162(m) for “performance-based” compensation effective for the Company’s taxable years beginning after December 31, 2017, subject to transition relief for binding contracts entered into prior to November 2, 2017.  Our AIP and LTI programs are designed to permit the grant and payment of equity or cash incentive awards that qualify as “performance-based” compensation, which, to the extent applicable, would be exempt from the Section 162(m) deduction limitation.  The Committee intends to administer the existing AIP and LTI programs, to the extent covered under the transition rule, with a view towards preserving their ability to qualify as exempt “performance-based” compensation for purposes of Section 162(m).  However, the Committee does not require all compensation programs, including AIP and LTI, to be fully deductible under Section 162(m) as the Committee believes it is important to preserve flexibility in maintaining compensation programs that are aligned with our compensation philosophy. Given the Tax Act repeal of the performance-based pay exception, the Committee may design future programs and administer the existing programs in a manner that does not satisfy the requirements for an exemption from the Section 162(m) deduction limit.

We currently expect that we will continue to structure our executive compensation program consistent with our pay for performance philosophy so that a significant portion of total executive compensation is linked to the performance of our Company.
44 | 2021 PROXY STATEMENT
EXECUTIVE COMPENSATION


Summary Compensation Table
The following table contains compensation information for the last three fiscal years relating to the named executive officers. Note that the AIP awards earned for each fiscal year are reported under the heading “Non-Equity Incentive Plan Compensation.” The values shown under the headings “Stock Awards” and “Option Awards” are the grant date fair values of the awards received in each fiscal year. This does not represent what was earned or paid out for these awards due to performance. The details of our named executive officers’ compensation are discussed in the Compensation Discussion and Analysis beginning on page 26. 

Name
And Principal
Position
Year
Salary
($) (1)
Bonus
($)
Stock
Awards(2)(3)
($)
Option
Awards(2)
($)
Non-
Equity
Incentive
Plan Compensation(4)
($)
All Other
Compensation(5)
($)
Total
($)
Shelly R. Ibach
President and CEO
2020$746,200$3,281,942$1,006,152$3,439,043$54,939$8,528,276
2019$988,462$2,878,408$978,858$1,521,835$44,727$6,412,290
2018$926,923$2,158,898$725,426$589,837$31,620$4,432,704
David R. Callen
EVP and CFO
2020$439,632$841,410$253,023$878,434$10,738$2,423,237
2019$502,437$395,740$135,133$354,544$16,023$1,403,877
2018$472,763$377,850$126,927$139,111$18,075$1,134,726
Andrea L. Bloomquist
EVP and Chief Innovation Officer
2020$467,106$458,120$153,333$790,860$9,957$1,879,376
2019$449,021$376,940$128,717$316,851$17,353$1,288,882
2018$429,484$323,749$108,825$126,376$20,061$1,008,495
Melissa Barra
EVP and Chief Sales and Services Officer
2020$316,133$592,615$148,550$789,588$15,959$1,862,845
2019$439,074$395,740$135,133$309,833$19,961$1,299,741
Kevin K. Brown
EVP and Chief Marketing Officer
2020$433,823$424,530$134,203$773,547$12,893$1,778,996
2019$440,130$339,105$115,885$310,578$21,117$1,226,815
2018$423,201$323,749$108,825$124,527$15,410$995,712
(1)The amounts in the “Salary” column for 2020 are lower for each of the named executive officers as a result of their participation in the Salary for Stock Offering which reduced their salary that would have been paid in 2020. For further information about this offering and the salary reduction amounts, see the discussion in the Compensation Discussion and Analysis under the heading “2020 Salary for Stock Offering.”
(2)Reflects the aggregate grant date fair value of equity awards granted during fiscal years 2020, 2019 and 2018, computed in accordance with FASB ASC Topic 718. See Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended January 2, 2021, for a discussion of the relevant assumptions used in calculating these amounts.
(3)The “Stock Awards” column includes Performance Stock Unit (PSU) awards granted during fiscal years 2020, 2019 and 2018. The amounts included for these awards represent the grant date fair value assuming the achievement of the performance goals for a target payout. If the PSU awards granted during fiscal year 2020 had been calculated assuming that the maximum payout had been earned, the grant date fair value of these PSU awards would have been as follows: for Ms. Ibach, $5,909,322 (target of $2,954,661); for Mr. Callen, $1,508,785 (target of $754,393); for Ms. Bloomquist, $900,563 (target of $450,282); for Ms. Barra, $872,376 (target of $436,188); and for Mr. Brown, $788,171 (target of $394,086). Also included in this column is the grant date fair value of Restricted Stock Unit (RSU) awards granted during fiscal year 2020 in connection with the Salary for Stock Offering. For further information, see the “Grants of Plan-Based Awards” table and the discussion in the Compensation Discussion and Analysis under the heading “Long-Term Incentive Plan (LTI).”
(4)Represents annual incentive compensation earned under the AIP. See the discussion in the Compensation Discussion and Analysis under the heading “Annual Incentive Plan (AIP).”
(5)The amounts in the “All Other Compensation” column include but are not limited to the costs of (i) reimbursement for personal financial planning and tax advice; (ii) Company sponsored physical exam; and (iii) Company matching contribution to the 401(k) Plan according to a matching formula and contribution limits that are the same for all participants. For the CEO, the amount shown for fiscal year 2020 includes $29,040 for the cost of security enhancements that were recommended as part of a security study conducted by an independent third party security consultant.


45 | 2021 PROXY STATEMENT
EXECUTIVE COMPENSATION


Grants of Plan-Based Awards
The following table summarizes for each of the named executive officers the non-equity incentive award opportunity under the AIP for fiscal year 2020 and the equity awards made during the fiscal year 2020. 

NameGrant
Date
Estimated Future Payouts
Under Non-Equity Incentive
Plan Awards(1)
Estimated Future Payouts
Under Equity Incentive
Plan Awards
All
Other
Stock
Awards:
Number
of Shares
of Stock
or Units
(#)
All
Other
Option
Awards:
Number
of
Securities
Under-
lying
Options
(#)
Exercise
or Base
Price of
Option
Awards
($/Sh)
Grant
Date
Fair
Value of
Stock and
Option
Awards
($)(5)
Thresh-
old
($)
Target
($)
Maxi-
mum
($)
Thresh-
old
(#)
Target
(#)
Maxi-
mum
(#)
Shelly R. Ibach$343,904$1,375,617$3,439,043
3/15/20(2)
6,87382,810165,620$2,954,661
3/15/20(3)
67,325$35.68$1,006,152
4/15/20(4)
14,405$327,282
David R. Callen$87,843$351,374$878,434
3/15/20(2)
1,01512,22524,450$436,188
3/15/20(3)
9,940$35.68$148,550
4/15/20(4)
3,830$87,018
12/15/20(2)
2983,5857,170$318,205
12/15/20(3)
2,845$88.76$104,473
Andrea L. Bloomquist$79,086$316,344$790,860
3/15/20(2)
1,04812,62025,240$450,282
3/15/20(3)
10,260$35.68$153,333
4/15/20(4)
345$7,838
Melissa Barra$78,959$315,835$789,588
3/15/20(2)
1,01512,22524,450$436,188
3/15/20(3)
9,940$35.68$148,550
4/15/20(4)
6,885$156,427
Kevin K. Brown$77,355$309,419$773,547
3/15/20(2)
91711,04522,090$394,086
3/15/20(3)
8,980$35.68$134,203
4/15/20(4)
1,340$30,445
(1)This represents the cash annual incentive opportunity for 2020 under the AIP.  The actual amounts earned under this plan for 2020 are reported in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table. The threshold reflects the amount that would be payable under the plan if only the minimum performance level for first half of 2020 is achieved, which would result in an AIP payout of only the progress payment.  If the minimum performance level for payment of the threshold amount is not achieved, then no incentive would be payable under the plan.  See discussion in the Compensation Discussion and Analysis under the heading “Annual Incentive Plan (AIP).”
(2)This represents PSU awards described in greater detail in the Compensation Discussion and Analysis under the heading, “Long-Term Incentive Plan (LTI).”  The target number of PSUs will be adjusted based on Company performance against annual growth goals over a three-year performance period covering fiscal years 2020, 2021 and 2022.  There can also be a reduction in the target number of PSUs for ROIC performance below a threshold.  PSUs are also subject to a three-year vesting requirement from the grant date.  If any dividends are paid on our common stock, the holders of the PSUs would receive dividends at the same rate as paid to other shareholders if and when the PSU award is earned and becomes fully vested.
(3)These awards represent stock options described in greater detail in the Compensation Discussion and Analysis under the heading, “Long-Term Incentive Plan (LTI).” These stock options have an exercise price equal to the closing trading price of the Company’s common stock on the grant date. The options vest in three equal annual installments on each of the anniversaries following the grant date. These options remain exercisable for up to 10 years from the grant date, subject to earlier termination upon certain events related to termination of employment.
(4)This represents time-vested RSU awards awarded in exchange for a voluntary reduction of base salary during fiscal year 2020 and are described in more detail in the Compensation Discussion and Analysis under the heading, “2020 Salary for Stock Offering”.
(5)Reflects the grant date fair value computed in accordance with FASB ASC Topic 718.  The value for PSU awards reflects the target award value.

46 | 2021 PROXY STATEMENT
EXECUTIVE COMPENSATION


Outstanding Equity Awards at Fiscal Year-End
The following table summarizes the total outstanding equity awards for each of the named executive officers as of January 2, 2021.
 Option AwardsStock Awards
NameNumber of Securities Underlying Unexercised Options
(#)  
Exercisable
Number of Securities Underlying Unexercised Options (#) 
Unexercisable
Option Exercise Price
($)
Option Expiration DateNumber of Shares or Units of Stock That Have Not Vested
(#)
Market Value of Shares or Units of Stock That Have Not Vested
($) (11)
Equity Incentive Plan Awards:  Number of Unearned Shares, Units or Other Rights That Have Not Vested
(#)
Equity Incentive Plan Awards:  Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested
($) (11)
Shelly R. Ibach29,480 — $33.32 3/16/2025— — — — 
 57,790 — $18.81 3/22/2026— — — — 
 53,720 — $23.61 3/21/2027— — — — 
 34,063 
17,032(1)
$34.35 3/21/2028— — — — 
 — — — — 
90,127(2)
$7,377,796 — — 
 13,469 
26,936(3)
$47.00 3/29/2029— — — — 
 — — — — — — 
49,700(4)
$4,068,442 
 3,349 
6,696(5)
$43.91 9/18/2029— — — — 
 — — — — — — 
12,355(6)
$1,011,380 
 — 
67,325(7)
$35.68 3/15/2030— — — — 
 — — — — — — 
82,810(8)
$6,778,827 
David R. Callen4,420 — $33.32 3/16/2025— — — — 
 11,600 — $23.61 3/21/2027— — — — 
 5,960 
2,980(1)
$34.35 3/21/2028— — — — 
 — — — — 
15,774(2)
$1,291,260 — — 
 2,282 
4,563(3)
$47.00 3/29/2029— — — — 
— — — — — — 
8,420(4)
$689,261 
 — 
9,940(7)
$35.68 3/15/2030— — — — 
— — — — — — 
12,225(8)
$1,000,739 
 — 
2,845(9)
$88.76 12/15/2030— — — — 
 — — — — — — 
3,585(10)
$293,468 
Andrea L. Bloomquist— 
2,555(1)
$34.35 3/21/2028— — — — 
 — — — — 
13,516(2)
$1,106,420 — — 
 — 
4,346(3)
$47.00 3/29/2029— — — — 
 — — — — — — 
8,020(4)
$656,517 
 — 
10,260(7)
$35.68 3/15/2030— — — — 
 — — — — — — 
12,620(8)
$1,033,073 

47 | 2021 PROXY STATEMENT
EXECUTIVE COMPENSATION


Outstanding Equity Awards at Fiscal Year-End, continued
 Option AwardsStock Awards
NameNumber of Securities Underlying Unexercised Options
(#)  
Exercisable
Number of Securities Underlying Unexercised Options (#) 
Unexercisable
Option Exercise Price
($)
Option Expiration DateNumber of Shares or Units of Stock That Have Not Vested
(#)
Market Value of Shares or Units of Stock That Have Not Vested
($) (9)
Equity Incentive Plan Awards:  Number of Unearned Shares, Units or Other Rights That Have Not Vested
(#)
Equity Incentive Plan Awards:  Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested
($) (9)
Melissa Barra6,300 — $21.28 2/18/2023— — — — 
4,860 — $17.77 3/28/2024— — — — 
3,315 — $33.32 3/16/2025— — — — 
— 
2,128(1)
$34.35 3/21/2028— — — — 
— — — — 
11,265(2)
$922,153 — — 
— 
4,563(3)
$47.00 3/29/2029— — — — 
— — — — — — 
8,420(4)
$689,261 
— 
9,940(7)
$35.68 3/15/2030— — — — 
— — — — — — 
12,225(8)
$1,000,739 
Kevin K. Brown6,230 — $17.77 3/28/2024— — — — 
4,420 — $33.32 3/16/2025— — — — 
8,255 — $18.81 3/22/2026— — — — 
7,935 — $23.61 3/21/2027— — — — 
5,110 
2,555(1)
$34.35 3/21/2028— — — — 
— — — — 
13,516(2)
$1,106,420 — — 
1,957 
3,913(3)
$47.00 3/29/2029— — — — 
— — — — — — 
7,215(4)
$590,620 
— 
8,980(7)
$35.68 3/15/2030— — — — 
— — — — — — 
11,045(8)
$904,144 
(1)These stock options were granted on March 21, 2018 and vest one-third each year on each of the first three anniversaries of the date of grant, subject to continuing employment through the applicable vesting date.
(2)These PSU awards were granted on March 21, 2018 and will become vested on March 21, 2021, subject to continuing employment through the applicable vesting date.  The number of shares shown above reflects the actual payout that was earned for the 2018 PSUs based on the performance period that covers fiscal years 2018, 2019 and 2020.  The payout for the 2018 PSU awards is described in greater detail in the Compensation Discussion and Analysis under the heading, “Long-Term Incentive Plan (LTI).”
(3)These stock options were granted on March 29, 2019 and vest one-third each year on each of the first three anniversaries of the date of grant, subject to continuing employment through the applicable vesting date.
(4)These PSU awards were granted on March 29, 2019 and will become vested on March 29, 2022, subject to achieving performance criteria and continuing employment through the vesting date.  The number of shares shown above reflects the target award level.  The performance period for this award covers fiscal years 2019, 2020 and 2021.
(5)These stock options were granted on September 18, 2019 and vest one-third each year on each of the first three anniversaries of the date of grant, subject to continuing employment through the applicable vesting date.
(6)These PSU awards were granted on September 18, 2019 and will become vested on September 18, 2022, subject to achieving performance criteria and continuing employment through the vesting date.  The number of shares shown above reflects the target award level.  The performance period for this award covers fiscal years 2019, 2020 and 2021
(7)These stock options were granted on March 15, 2020 and vest one-third each year on each of the first three anniversaries of the date of grant, subject to continuing employment through the applicable vesting date.
(8)These PSU awards were granted on March 15, 2020 and will become vested on March 15, 2023, subject to achieving performance criteria and continuing employment through the vesting date.  The number of shares shown above reflects the target award level.  The performance period for this award covers fiscal years 2020, 2021 and 2022.
(9)These stock options were granted on December 15, 2020 and vest one-third each year on each of the first three anniversaries of the date of grant, subject to continuing employment through the applicable vesting date.
(10)These PSU awards were granted on December 15, 2020 and will become vested on December 15, 2023, subject to achieving performance criteria and continuing employment through the vesting date.  The number of shares shown above reflects the target award level.  The performance period for this award covers fiscal years 2020, 2021 and 2022.
48 | 2021 PROXY STATEMENT
EXECUTIVE COMPENSATION


(11)Calculated by multiplying unvested stock awards by $81.86, the closing price of the Company’s common stock on the Nasdaq Stock Market on December 31, 2020, the last trading day of fiscal year 2020.

Option Exercises and Stock Vested
The following table summarizes the stock options that were exercised and the stock awards that became vested for each of the named executive officers during the fiscal year ended January 2, 2021.

Option AwardsStock Awards  
NameNumber of Shares Acquired
on Exercise
(#)
Value Realized
on Exercise
($)(1)
Number of Shares Acquired
on Vesting
(#)(2)
Value Realized on Vesting
($)(3)
Shelly R. Ibach97,426$3,838,263103,456$3,336,623
David R. Callen18,405$676,916
23,054(4)
$781,430
Andrea L. Bloomquist8,596$309,73319,569$485,658
Melissa Barra22,729$949,46820,037$896,558
Kevin K. Brown14,492$425,954
(1)The value realized on the exercise of stock options for purposes of this table is based on the difference between the fair market value of our common stock on the date of exercise and the exercise price of the stock option.
(2)The amounts shown in these columns represented the number of shares that were earned and paid out for the 2017 PSU award that covered the performance period of fiscal years 2017, 2018, and 2019 as disclosed in the 2020 Proxy Statement and shares that were earned and paid out for RSU awards under the 2020 Salary for Stock Offering, which is described in more detail in the Compensation Discussion and Analysis under the heading, “2020 Salary for Stock Offering.” The 2017 PSU awards became vested on March 21, 2020 and the RSU awards became vested on December 26, 2020. The number of shares acquired on vesting under the 2017 PSU awards were as follows: Ms. Ibach, 89,051 shares; Mr. Callen, 19,224 shares; Ms. Bloomquist, 19,224 shares; Ms. Barra, 13,152 shares; and Mr. Brown, 13,152 shares. The number of shares acquired on vesting under the RSU awards were as follows: Ms. Ibach, 14,405 shares; Mr. Callen, 3,830 shares; Ms. Bloomquist, 345 shares; Ms. Barra, 6,885 shares; and Mr. Brown, 1,340 shares.
(3)The value realized for purposes of this table is based on the fair market value of our common stock on the date of vesting.
(4)Under the Company’s Executive Deferral Plan (described in the Nonqualified Deferred Compensation table below), Mr. Callen deferred the receipt of 19,224 shares until the earlier of March 21, 2022 or the termination of his employment. The value of these deferred shares realized on vesting is based on the closing stock price on the vesting date, regardless of whether the payout had been deferred. The actual value of the deferred shares when paid out in the future may be different than the value reflected in this table. The value realized on vesting is also reflected in the “Executive Contributions in Last Fiscal Year” column in the Nonqualified Deferred Compensation table below.

Nonqualified Deferred Compensation
Named executive officers are eligible to participate in the Sleep Number Executive Deferral Plan (Deferral Plan), a non-qualified deferred compensation plan. The Deferral Plan allows executives to defer payment of up to 50% of their base salary, 75% of their AIP payout, and 100% of their payout from PSUs or other stock awards. At the time that executives make their deferral election, they choose whether their deferrals will be paid out in a lump sum or up to ten annual installments following a specified future date or their termination of employment. For salary or AIP deferrals, executives choose how to allocate their deferrals across a range of notional investment alternatives that are similar to the investment fund options in the Company’s 401(k) Plan. The executive’s deferral account is credited with the earnings as if there was a deemed investment in the notional investment alternatives offered for the Deferral Plan. For deferrals of PSUs or other stock awards, the amounts deferred are tracked in deferred share units and distributions are settled in shares of common stock.


49 | 2021 PROXY STATEMENT
EXECUTIVE COMPENSATION


The following table summarizes for each named executive officer their contributions, earnings and balance for the Deferral Plan for the fiscal year ended January 2, 2021. Note that the Company does not make any contributions to the Deferral Plan on behalf of participants.

Name
Executive Contributions in Last Fiscal Year(1)
($)
Registrant Contributions in Last Fiscal Year
($)
Aggregate Earnings in Last Fiscal Year(2)
($)
Aggregate Withdrawals/Distributions
($)
Aggregate Balance at Last Fiscal Year-End(3)
($)
Shelly R. Ibach$1,460,030$2,052,793$9,145,230
David R. Callen$456,378$1,446,538$162,377$2,764,064
Andrea L. Bloomquist$237,482$85,968$549,784
Melissa Barra
Kevin K. Brown$12,009$76,765
(1)The amounts in this column represent deferred amounts credited to the executive’s deferral accounts during fiscal year 2020.  This includes base salary deferrals for 2020 that are included in the “Salary” column of the “Summary Compensation Table” as follows:  for Ms. Ibach, $538,461; and for Ms. Bloomquist, $237,482.  This includes AIP deferrals for amounts that would have normally been paid out in 2020 and are included in the “Non-Equity Incentive Plan Awards” column of the “Summary Compensation Table” for Ms. Ibach of $921,569. For Mr. Callen, the amount shown is the market value on the vesting date of the deferral of the 2017 PSU payout as disclosed in the “Option Exercises and Stock Vesting” table and footnote.
(2)These amounts represent the total aggregate notional earnings for fiscal year 2020 for the executive’s deferral account under the Deferral Plan. These are notional earnings based on how the executive has elected to direct their salary or AIP deferrals to various investment alternatives, and the actual market return of that investment alternative for the year. For RSU deferrals, earnings represent the change in market value of the deferred share units held in the executive’s deferral account.
(3)This is the aggregate market value of the executive’s deferral account under the Deferral Plan as of the end of fiscal year 2020.

Potential Payments Upon Termination or Change in Control
This section describes the potential payments that would be made to the named executive officers under various employment termination scenarios as if they occurred at the end of fiscal year 2020 (as of January 2, 2021).  The values shown in the table are calculated as of this date based on certain estimates or assumptions as described in the footnotes.  The actual amounts received may differ materially from those shown in the table.  The table does not include amounts already vested that the executive would receive if he or she left the Company for any reason, such as the fully vested balance of an executive’s deferral account, gains from outstanding options that are exercisable, or payments and benefits that are provided on a non-discriminatory basis to salaried team members generally upon termination.

All Sleep Number team members, including all executive officers, are “at will” team members, meaning that the team member or the Company may terminate the employment relationship with or without cause and with or without notice, at any time at the option of either the team member or the Company.  Executive officers do not have employment agreements and do not have any contractual or other right to employment for any term or period of time.  In addition, executive officers are only eligible for the severance pay and other benefits as provided under the Company’s Executive Severance Pay Plan as shown in the table and described in the footnotes.

The table below shows information about the acceleration of option or stock awards in the event of a change in control as defined under the Company’s 2020 Equity Incentive Plan (the 2020 Plan).  The 2020 Plan contains a “double-trigger” change in control provision.  Under this provision, if outstanding option or stock awards are assumed or substituted following a change in control, vesting of the option or stock awards is only accelerated in the event of involuntary termination not for cause or resignation for good reason of the team member, as those terms are defined under the 2020 Plan.  This is provided that the team member’s termination of employment occurs within two years of the change in control.


50 | 2021 PROXY STATEMENT
EXECUTIVE COMPENSATION


Vesting of option or stock awards may also be accelerated in the event a named executive officer qualifies for retirement treatment under the terms of the award agreements and the 2020 Plan.  If an executive is at least age 55 and has five or more years of service at retirement, the vesting will be accelerated on a pro-rata portion of their option or stock award based on the portion of the vesting period that was actually worked through the date of retirement. For option and stock awards granted beginning in fiscal 2017, an additional retirement provision was added.  If an executive is at least age 60 and has five or more years of service at retirement, there is a full acceleration of vesting of the option or stock award provided that the executive gives a one-year notice of their intention to retire.  This additional acceleration of vesting provision does not apply to any option or stock award granted within less than a year of retirement.

  Triggering Events
NameType of PaymentVoluntary
Termination
($)
For Cause
Termination
($)
Involuntary
Termination
(No Change in
Control)
($)
Involuntary
Termination
(Following
Change in
Control) (1)
 ($)
Death or
Disability
($)
Shelly R. Ibach
Cash Severance (2)
— — $5,075,000 $7,605,000 — 
 
Option Award Acceleration (3)
$1,864,860 — $1,864,860 $5,111,361 $5,111,361 
 
Stock Award Acceleration (4)
$11,496,582 — $11,496,582 $19,236,445 $19,236,445 
 
Benefit Reimbursement (5)
— — $9,782 $9,782 — 
 Total$13,361,442 — $18,446,224 $31,962,588 $24,347,806 
David R. Callen
Cash Severance (2)
— — $916,814 $1,823,628 — 
 
Option Award Acceleration (3)
— — — $759,675 $759,675 
Stock Award Acceleration (4)
— — — $3,274,727 $3,274,727 
Benefit Reimbursement (5)
— — $11,996 $11,996 — 
 Total— — $928,810 $5,870,026 $4,034,402 
Andrea L. Bloomquist
Cash Severance (2)
— — $828,125 $1,646,250 — 
 
Option Award Acceleration (3)
— — — $746,696 $746,696 
 
Stock Award Acceleration (4)
— — — $2,796,010 $2,796,010 
 
Benefit Reimbursement (5)
— — — — — 
 Total— — $828,125 $5,188,956 $3,542,706 
Melissa Barra
Cash Severance (2)
— — $825,097 $1,640,195 — 
 
Option Award Acceleration (3)
— — — $719,197 $719,197 
 
Stock Award Acceleration (4)
— — — $2,612,153 $2,612,153 
 
Benefit Reimbursement (5)
— — $11,996 $11,996 — 
 Total— — $837,093 $4,983,541 $3,331,350 
Kevin K. Brown
Cash Severance (2)
— — $810,216 $1,610,431 — 
 
Option Award Acceleration (3)
— — — $672,492 $672,492 
 
Stock Award Acceleration (4)
— — — $2,601,183 $2,601,183 
 
Benefit Reimbursement (5)
— — $11,463 $11,463 — 
 Total— — $821,679 $4,895,569 $3,273,675 
(1)The amounts payable to the named executive officers upon a change in control may be subject to reduction under Sections 280G and 4999 of the Internal Revenue Code.
(2)Our named executive officers are participants in the Company’s Executive Severance Pay Plan. Under this plan, a participant is eligible for severance pay and other benefits in the event of involuntary termination not for cause or resignation for good reason (qualifying termination), as those terms are defined under the plan. There is no severance pay benefit for voluntary termination or involuntary termination for cause. As a condition of receiving any severance pay under the plan, the executive must agree to a general release of claims against the Company. The amount of the severance pay payable for a qualifying termination is a multiple of the sum of the executive’s annual base salary plus the target annual incentive award under AIP, as of the date of termination. For Ms. Ibach, the multiple is two times and for all other NEOs, the multiple is one times. If the qualifying termination occurs within a period starting six months before a change in control event and ending two years after a change in control event, the multiple would be as follows: For Ms. Ibach, three times; for all other NEOs, two times. In order to receive the additional severance pay for qualifying terminations after a change in control, the executive must agree to refrain from certain restricted activities for an extended period of two years after termination of employment. The plan defines restricted activities to include certain competitive and solicitation activities. Severance pay benefits are paid in a lump sum following termination of employment. The cash severance amounts shown above were calculated using annual base salary and target annual incentive for AIP in effect for each executive as of the end of fiscal 2020. Also under the plan, participants are eligible for outplacement services. The maximum value of this benefit is included in the cash severance amounts shown above. The plan does provide for a pro-rata annual incentive award under AIP for the period of the year that the participant was actively employed. The calculations for this table are as
51 | 2021 PROXY STATEMENT
EXECUTIVE COMPENSATION


of the end of the fiscal year, which is when participants in the AIP become eligible for the full incentive award earned for that fiscal year. As a result, the table does not include any value for a pro-rata annual incentive.
(3)The value of the acceleration of the vesting of unvested stock options held by a named executive officer is based on the difference between: (i) the fair market value of our common stock as of December 31, 2020 ($81.86) and (ii) the per share exercise price of the options held by the executive. The range of exercise prices of unvested stock options held by our named executive officers included in the table as of January 2, 2021 was $34.35 to $88.76. For voluntary termination when an executive is eligible for retirement treatment (age 55 and five or more years of service), the number of unvested stock options is prorated in valuing the acceleration of vesting.
(4)The value of the acceleration of the vesting of stock awards held by a named executive officer is based on: (i) the number of unvested RSUs held by the executive as of January 2, 2021, multiplied by (ii) the fair market value of our common stock on December 31, 2020 ($81.86). Performance RSUs whose performance period had been completed as of January 2, 2021 are reflected based on the actual payout earned. All other Performance RSUs are reflected at target. For voluntary termination when an executive is eligible for retirement treatment (age 55 and five or more years of service), the number of unvested RSUs is prorated in valuing the acceleration of vesting.
(5)For a qualifying termination under the Executive Severance Pay Plan, a named executive officer is eligible to receive a reimbursement equal to the difference in cost between the monthly COBRA premium and the monthly cost for the medical plan coverage while an active team member. The reimbursement is for as long as the executive is covered by COBRA but for a period not to exceed two years for Ms. Ibach and one year for all other NEOs.

CEO Pay Ratio
As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, we are providing the following information about the relationship of the annual total compensation of our team members and the annual total compensation of our CEO. For fiscal year 2020, we determined on January 2, 2021 that the annual total compensation of the team member identified as the median was $50,496. Based on this information, the 2020 ratio of the annual total compensation of our CEO, as reported in the Summary Compensation Table under the heading “Total,” to the median annual total compensation of all team members, excluding our CEO, was estimated to be 169 to 1.

The following is a summary of the methodology and assumptions used in determining the median annual total compensation of our team members for 2020:
We used our total active team member population as of the end of fiscal year 2020.
For measuring total compensation of our team members, we included base wages, incentive compensation, commissions, over-time, paid time off and holiday pay that was actually paid to each team member during fiscal year 2020.
For team members included in the population that were hired during fiscal year 2020, we annualized their actual total compensation to consider that they worked for only a portion of the year.

It should be noted that under the SEC’s rules and guidance, there are numerous ways to determine the compensation of a company’s median employee, including the employee population sampled, the elements of total compensation included, any assumptions made and the use of statistical sampling. In addition, no two companies have identical employee populations or compensation programs. As such, our pay ratio may not be comparable to the pay ratio reported by other companies.
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Director Compensation
The following table summarizes the total compensation paid or earned by each of the non-employee members of our Board of Directors for the 2020 fiscal year ended January 2, 2021.

NameFees
Earned or
Paid in
Cash
($)
Stock
Awards(1)
($)
Option
Awards(2)
($) 
All Other
Compensation
($)
Total
($)
Daniel I. Alegre(6)
$84,412 $54,142 $18,154 $— $156,708 
Stephen L. Gulis, Jr.(3)(6)
$84,912 $54,142 $18,154 $20 $157,228 
Michael J. Harrison(6)
$99,294 $54,142 $18,154 $190 $171,780 
Julie M. Howard(6)
$67,714 $54,142 $18,154 $6,601 $146,611 
Deborah L. Kilpatrick, Ph.D.(5)(6)
$85,353 $54,142 $18,154 $120 $157,769 
Brenda J. Lauderback(3)(6)
$99,766 $54,142 $18,154 $— $172,062 
Barbara R. Matas (3)(4)
$100,500 $54,142 $18,154 $— $172,796 
Kathleen L. Nedorostek (4)
$85,000 $54,142 $18,154 $— $157,296 
Michael A. Peel(7)
$42,500 $— $— $— $42,500 
Jean-Michel Valette(6)
$208,769 $54,142 $18,154 $120 $281,185 
(1)Reflects the aggregate grant date fair value of 1,815 restricted stock awards granted during fiscal year 2020, computed in accordance with FASB ASC Topic 718. See Note 8, Shareholders’ Deficit, to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended January 2, 2021, for a discussion of the relevant assumptions used in calculating these amounts. As of January 2, 2021, the aggregate number of shares outstanding under stock awards, including restricted stock, restricted stock units and phantom stock, held by those who served as non-employee Directors during fiscal year 2020 was as follows: Mr. Alegre, 1,815 shares; Mr. Gulis, 73,742 shares; Mr. Harrison, 2,938 shares; Ms. Kilpatrick, 1,815 shares; Ms. Lauderback, 10,388 shares; Ms. Matas, 18,331 shares; Ms. Nedorostek, 20,393 shares; and Mr. Valette, 1,815 shares.
(2)Reflects the aggregate grant date fair value of 1,475 stock option awards granted during fiscal year 2020, computed in accordance with FASB ASC Topic 718. See Note 8, Shareholders’ Deficit, to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended January 2, 2021, for a discussion of the relevant assumptions used in calculating these amounts. As of January 2, 2021, the aggregate number of stock options outstanding held by those who served as non-employee Directors during fiscal 2020 was as follows: Mr. Alegre, 16,862; Mr. Gulis, 3,340; Mr. Harrison, 20,331; Ms. Howard, 1,475, Ms. Kilpatrick, 5,505; Ms. Lauderback, 19,361; Ms. Matas, 3,340; Ms. Nedorostek, 22,737; and Mr. Valette, 1,475.
(3)Under the 2010 Omnibus Incentive Plan and 2020 Equity Incentive Plan, non-employee Directors may elect to defer receipt of any shares of the Company’s common stock under an Incentive Award granted to non-employee Directors under the Plan. For fiscal 2020, the following Directors have elected to defer receipt of their 2020 Incentive Award: Mr. Gulis, 1,815 shares; Ms. Lauderback, 1,815 shares; and Ms. Matas, 1,815 shares.
(4)Ms. Matas and Ms. Nedorostek elected to receive Director fees in the form of common stock under the Company’s 2010 Omnibus Incentive Plan and 2020 Equity Incentive Plan, and to defer receipt of such shares. The number of shares paid is determined by dividing the amount of the Director’s fees to be deferred by the fair market value per share of our common stock on the date the fees otherwise would have been payable in cash. The number of shares to be received by Ms. Matas in lieu of cash payments during fiscal 2020 is 2,225 shares and the related grant date fair value was $100,000. The number of shares to be received by Ms. Nedorostek in lieu of cash payments during fiscal 2020 is 1,914 shares and the related grant date fair value was $86,000.
(5)Ms. Kilpatrick elected to receive a portion of Director fees in the form of common stock under the Company’s 2010 Omnibus Incentive Plan and 2020 Equity Incentive Plan. The number of shares paid is determined by dividing the amount of the Director’s fees to be received in the form of common stock by the fair market value per share of our common stock on the date the fees otherwise would have been payable in cash. The number of shares received by Ms. Kilpatrick in lieu of cash payments during fiscal 2020 was 1,416 shares and the related grant date fair value was $63,618.
(6)Under a Retainer for Stock Offering, directors were given the opportunity to voluntarily reduce their cash retainer in exchange for receiving an RSU award which vested on December 15, 2020. The number of RSUs and related grant date fair value under this program reflected in Fees Earned or Paid in Cash were as follows: Mr. Alegre, 2,780 and $63,162; Mr. Gulis, 2,780 and $63,162; Mr. Harrison, 3,270 and $74,294; Ms. Howard, 2,270 and $67,714; Ms. Kilpatrick, 695 and $15,790; Ms. Lauderback, 980 and $22,266; and Mr. Valette, 5,145 and $116,894.
(7)Mr. Peel retired from the Board when his term expired at the 2020 Annual Meeting of Shareholders. Following his retirement from the Board, Mr. Peel was appointed to serve in a non-voting advisory role, as Director Emeritus. The fees reflected in the table above reflect those fees earned prior to his retirement from the Board. In his capacity as Director Emeritus, Mr. Peel has received compensation consistent with that of non-employee directors.

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EXECUTIVE COMPENSATION


Summary of Non-Employee Director Compensation
The compensation payable to non-employee directors of Sleep Number Corporation is reviewed and determined annually by the Management Development and Compensation Committee, typically at the quarterly meeting in May of each year.

Annual Cash Retainer. For each of the last three years, each of our non-employee directors received an annual cash retainer of $85,000. The Chairs of each of the Committees of the Board received additional cash compensation of $15,000 per year. The non-executive Chairman of the Board received an additional cash retainer of $125,000 per year.

Meeting Fees. In 2020, each non-employee director (other than the non-executive Chairman of the Board) received meeting fees for Board and Committee meetings attended beyond the normal number of regular or typical meetings for the Board and each Committee in a fiscal year, including: (i) Board meeting fees of $1,000 per in-person meeting and $500 per virtual meeting after a minimum of eight Board meetings for the fiscal year, and (ii) Committee meeting fees of $750 per in-person Committee meeting and $500 per virtual Committee meeting after a minimum of eight meetings for each Committee for the fiscal year.

Equity Compensation. Coincident with the annual meeting of shareholders, non-employee directors are eligible to receive equity compensation in amounts determined by the Management Development and Compensation Committee, of which generally 75% would be paid in the form of RSUs and 25% in stock options, based on Black-Scholes valuation, with the grants to vest on the earlier of one year from the date of grant or the date of the next annual meeting at which directors are elected to the Board, so long as the director continues to serve on our Board of Directors. All options granted to directors have an exercise price equal to the fair market value of our common stock on the date of grant and remain exercisable for a period of up to 10 years, subject to continuous service on our Board of Directors. In 2020, the Management Development and Compensation Committee established an annual equity compensation target of $115,000 for each of our non-employee directors, which was unchanged from 2019. The actual equity compensation granted to non-employee directors in the fiscal year was on May 13, 2020 and is set forth above. The Management Development and Compensation Committee approved the use of a share price of $47.55 for determining the number of RSUs granted and a Black-Scholes value per option of $19.50 for determining the number of stock options granted. This was equal to the 20 day average closing share price and Black-Scholes value per option utilized for grants to NEOs as part of our annual LTI process on March 15, 2020. If our normal grant practices had been followed for grants to non-employee directors on May 13, 2020, the 20 day average closing share price would have been $28.14 and the Black-Scholes value per option would have been $11.53. The option exercise price for stock options granted to non-employee directors on May 13, 2020 was $29.83.

Reimbursement of Expenses. All of our directors are reimbursed for travel expenses for attending meetings of our Board or any of the Committees and for attending approved director continuing education programs.

No Director Compensation for Employee Directors. Any director who is also an employee of our Company does not receive additional compensation for service as a director.


54 | 2021 PROXY STATEMENT
EXECUTIVE COMPENSATION


Equity Compensation Plan Information

Plan Category
Number of securities to be issued upon exercise of outstanding options, warrants and rights(1) (a)
Weighted average exercise price of outstanding options, warrants and rights(3) (b)
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))(4) (c)
Equity compensation plans approved by security holders1,713,741
(2)
$30.74 2,435,596 
Equity compensation plans not approved by security holdersNone Not applicableNone
Total1,713,741  $30.74 2,435,596 
(1)Includes the Sleep Number Corporation 2020 Equity Incentive Plan and the Sleep Number Corporation 2010 Omnibus Incentive Plan.
(2)This amount includes 301,398 restricted stock units, 519,749 performance-based stock units, and 79,853 phantom shares. Performance-based stock units are shown at target. The actual number of shares to be issued under performance-based stock unit awards depends on Company performance against goals.
(3)The weighted average exercise price does not take into account the unvested restricted stock units, performance-based stock units, or phantom shares, which have no exercise price.
(4)This represents the number of shares of common stock available for issuance under the Sleep Number Corporation 2020 Equity Incentive Plan.
55 | 2021 PROXY STATEMENT
EXECUTIVE COMPENSATION

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Background
Consistent with the views expressed by shareholders at our 2017 Annual Meeting when we last asked our shareholders to cast an advisory vote as to whether future advisory votes on executive compensation, or “say-on-pay” votes, should occur every year, every two years or every three years, the Board of Directors has determined to hold an advisory vote to approve executive compensation annually. The next advisory vote on the frequency of our “say-on-pay” vote will be put to our shareholders at our 2023 Annual Meeting.

This advisory resolution, commonly referred to as “say-on-pay,” is being provided to our shareholders as required pursuant to Section 14A of the Securities Exchange Act and is non-binding on the Company and the Board of Directors. However, the Board and the Management Development and Compensation Committee value the opinions of our shareholders and will carefully consider the outcome of the vote when making future compensation decisions. The next “say-on-pay” vote will be held at our 2022 Annual Meeting.

As described more fully in the Compensation Discussion and Analysis section of this Proxy Statement, our compensation programs are structured to align the interests of our executive officers with the interests of our shareholders. They are designed to attract, motivate and retain, a talented management team to achieve superior results. Shareholders are urged to read the CD&A, which discusses in-depth how our executive compensation programs are aligned with our performance and the creation of shareholder value.

PROPOSAL

THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” APPROVAL OF THE FOLLOWING NON-BINDING ADVISORY RESOLUTION AT THE 2021 ANNUAL MEETING:

RESOLVED, that the shareholders of Sleep Number Corporation approve, on an advisory basis, the compensation of the Company’s named executive officers as described in the Compensation Discussion and Analysis, tabular disclosures and other executive compensation narrative provided in this Proxy Statement for the Company’s 2021 Annual Meeting of Shareholders.

Vote Required
The affirmative vote of the holders of a majority of the shares of common stock present and entitled to vote directly or by proxy on this matter at the Annual Meeting, and at least a majority of the minimum number of shares necessary for a quorum, is necessary for approval of the foregoing resolution. Unless a contrary choice is specified, proxies solicited by the Board of Directors will be voted “For” approval of the foregoing resolution.

56 | 2021 PROXY STATEMENT
PROPOSAL 2 - ADVISORY VOTE TO APPROVE EXECUTIVE COMPENSATION

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The Audit Committee of the Board of Directors is responsible for providing independent, objective oversight with respect to our Company’s accounting and financial reporting functions, internal and external audit functions, systems of internal controls regarding financial matters, cybersecurity, and legal, ethical and regulatory compliance. The Audit Committee operates under a written charter approved by the Board of Directors. A copy of the charter is available at the Investor Relations section of the Company’s website at http://ir.sleepnumber.com. The information contained in or connected to our website is not incorporated by reference into or considered a part of this Proxy Statement.

The Audit Committee is currently composed of four directors, each of whom is independent as defined by the Nasdaq listing standards and SEC Rule 10A-3. Barbara R. Matas (Chair), Stephen L. Gulis, Jr. and Deborah L. Kilpatrick, Ph.D. served on the Audit Committee throughout 2020 and through the date of this report. Julie M. Howard joined the Audit Committee upon her appointment to the Board of Directors at the 2020 Annual Meeting of Shareholders and has continued to serve on the Audit Committee through the date of this report.

Management is responsible for our Company’s financial reporting processes and internal control over financial reporting. Deloitte & Touche LLP, our Independent Registered Public Accounting Firm, is responsible for auditing our Company’s consolidated financial statements for the 2020 fiscal year. This audit is to be conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States). The Audit Committee’s responsibility is to monitor and oversee these processes.

In connection with these responsibilities, the Audit Committee met in person or virtually nine times during 2020. These meetings involved representatives of management, internal audit and the independent auditors. At each of its regularly scheduled quarterly meetings, the Audit Committee meets in executive session and also meets in separate executive sessions with representatives of the Independent Registered Public Accounting Firm and with the executive who leads our internal audit function.

Management represented to the Audit Committee that our Company’s consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America. The Audit Committee has reviewed and discussed the consolidated financial statements, together with the results of management’s assessment of the Company’s internal control over financial reporting, with management and the Independent Registered Public Accounting Firm. The Audit Committee discussed with the Independent Registered Public Accounting Firm the matters required to be discussed with the auditors under Statement on Auditing Standards No. 61 “Communication with Audit Committees” (Codification of Statements on Auditing Standards, AU 380), as amended. The Independent Registered Public Accounting Firm provided the Audit Committee with written disclosures and the letter required by applicable requirements of the Public Company Accounting Oversight Board, and the Audit Committee discussed with the Independent Registered Public Accounting Firm that firm’s independence.

Based upon the Audit Committee’s discussions with management, internal audit and the Independent Registered Public Accounting Firm and the Audit Committee’s review of the representations of management and the Independent Registered Public Accounting Firm, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements be included in our Company’s Annual Report on Form 10-K for the year ended January 2, 2021, for filing with the Securities and Exchange Commission.
57 | 2021 PROXY STATEMENT
AUDIT COMMITTEE REPORT


This Audit Committee Report shall not be deemed incorporated by reference by any general statement incorporating by reference this Proxy Statement into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under such Acts.

The Audit Committee of the Board of Directors

Barbara R. Matas, Chair 
Stephen L. Gulis, Jr.
Deborah L. Kilpatrick, Ph.D.
Julie M. Howard

58 | 2021 PROXY STATEMENT
AUDIT COMMITTEE REPORT

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The Audit Committee of our Board of Directors selected Deloitte & Touche LLP (Deloitte) as the Company’s independent registered public accounting firm (Independent Auditors) for the 2021 fiscal year ending January 1, 2022. Deloitte has served as our Independent Auditors since the 2010 fiscal year.

Although the Board is not required to submit the selection of Independent Auditors to shareholders for ratification, and the Board would not be bound by shareholder ratification or failure to ratify the selection, the Board wishes to submit the selection of Deloitte to serve as our Independent Auditors for the 2021 fiscal year to our shareholders for ratification consistent with best practices in corporate governance.

If shareholders do not ratify the selection of Deloitte as our Independent Auditors, the Audit Committee will reconsider whether to retain Deloitte and may determine to retain that firm or another firm without resubmitting the matter to shareholders. Even if the selection of Deloitte is ratified by shareholders, the Audit Committee may, in its discretion, direct the appointment of a different firm of Independent Auditors at any time during the year if it determines that such a change would be in the best interests of the Company and our shareholders.

Representatives of Deloitte will be present at the Annual Meeting, will have an opportunity to make a statement if they so desire and will be available to respond to questions from shareholders.

AUDIT AND OTHER FEES
The aggregate fees billed for professional services by the Independent Auditors in 2020 and 2019 were:

2020
2019
Audit fees$671,468 $781,080 
Audit-related fees1,895 1,895 
Audit and audit-related fees$